What Impact Does Foreclosure Have on Student Loans?
- Most federal student loans do not require a credit check, so a foreclosure probably won't have an effect on your federal loans. Only the PLUS loan, a low interest loan for parents, requires a credit history with no derogatory accounts, such as a foreclosure. However, if you, the parent, do not qualify for a PLUS loan, the government increases your student's Stafford loan borrowing limit which is not dependent on a credit check, according to FinAid.org.
- Foreclosure tends to have the most impact on private student loans because private lenders factor credit scores heavily into their approval process. Your credit rating should see a drop of 85 to 160 points after a foreclosure hits your credit report, according to Les Christie of CNN. A drop this big may increase the interest rate on your student loans by four points or more -- if you qualify for any private student loans at all. If you cannot qualify for private student loans, your child may not have a good enough credit history to qualify on his own. Also, as a credit score decreases, you qualify for lower borrowing limits.
- Your student may receive more financial aid because of your foreclosure. For example, if you derived a significant part of your income from the property, such as if you run an apartment complex, the foreclosure reduces your gross income. A lower income usually decreases your student's expected family contribution calculations, which the government uses to estimate how much your family contribute to your child's college education.
- If you have already defaulted on a mortgage, the missed payments stay on your report for the next seven years, but you can limit further damage. For example, you can sell the home and negotiate a payment agreement with the lender for any remaining balance. Alternatively, you may ask the lender to modify your loan, such as lowering the interest rate or stretching out the life of the loan to lower the monthly payment.
