Will the IBR Student Loan Payment Would Hurt My Credit? – Cristina


Dear Steve,

I have a student loan that I accrued out of college at $55,000. Well since the 9/11 and following I became a single mom in 2005 and have been experiencing financial hardship although I have a great college education, I can’t seem to get a job offer in my field for diddly squat. My unemployment deferment is used up along with the forbearance.

Now they are asking me to file a income based repayment (IBR). My friend told me that that information would hurt my credit score that I had been building back up since my bankruptcy in 1998 and also a repossession for a car I co-signed for my son’s dad in 2005. My score is at 700 and I’m not going to jeopardize my effort.

Since I have never been educated about financial matters and I really didn’t have any understanding about compound interest, etc…I chose to consolidate at 8.25% for $55,000. I feel that I was taken advantage of and that I will never be able to pay off the balance of pretty much 300% interest. My loan exceeds $170,000.

My friend suggested that I default on my student loan since it will clear up after 8 years, versus a student loan takes 25 years before they pardon the balance. I don’t want to file a IBR if it’s going to affect my FICO. What is your take on this and would it be better to just let it default since I have nothing to lose? Why don’t they have financial education in our schools?



Dear Cristina,

Let me address the issue of financial education and financial literacy first. It doesn’t work. See my recent article Financial Literacy is a Dumb Waste of Time and Money Because It Just Doesn’t Work.

I’m not sure who your friend is but I would skip getting future financial advice from them.

Putting your loans into a Direct Consolidation Loan and then selecting an income driven repayment program, like the IBR, will give you the lowest possible student loan payment and keep the loan out of default.

When you enroll in the Income Based Repayment program you are not defaulting. The loan will be reported as current, even if you qualify for a $0 payment each month.

And let’s say you defaulted on your federal student loans as your friend suggested. In that case the balance would be hit with about a 20% collection penalty and your balance would now be about $204,000. You would be in collections, your tax refunds could be intercepted, and your wages could be garnished.

I suspect there are other issues that have been holding back your credit score. With some focus it is easy to get a great credit score within a couple of years after bankruptcy. Read How to Easily Rebuild Your Credit and Have Good Credit Again After Bankruptcy.

If you opt for the IBR approach it is true that the balance would not be forgiven for another 25 years but your payment would also be low and you would not be in default. The big issue with the IBR and other income based programs can be found in Why Income Based Student Loan Payments Can Be a Terrible Trap.

But considering your balance has been growing because of forbearance and deferment and you have a continued financial hardship, I don’t really see as much of a downside for the IBR program.

For more information on the income driven repayment programs, click here.

Steve Rhode
Get Out of Debt GuyTwitter, G+, Facebook

If you have a credit or debt question you’d like to ask, just click here and ask away.

This article by Steve Rhode first appeared on Get Out of Debt Guy and was distributed by the Personal Finance Syndication Network.