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Student Loans: The Wolf in Sheep’s Clothing

You’ve completed your higher education, earned your degree and flipped that tassel from one side to the other.  It’s official; you’re a college graduate.  That’s the good news.  The bad news is that many of you have earned a degree in debt, student loan debt that is.  In fact, student loan debt is now well in excess of $800 billion and greater than credit card debt.

For the kids who graduated this past May or June, you’ve been enjoying the 6-month safe harbor referred to as “deferment.”  Deferment means no payment is due, not yet.  However, in November millions of graduates will get something in the mail they’ve never seen before…an invoice.  As you move from undergrad to underemployed there are a few things you need to keep in mind regarding those student loans.

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Student loans tend to be reported to the credit reporting agencies on a disbursement basis.  This means if you took out 4 loans to pay for 4 years of college, it’s very likely that you now have 4 separate loans on your credit reports.  This isn’t good for your credit because credit scores penalize you for having multiple accounts with balances.

Missing payments on your student loans is also problematic.  You don’t get a “do over” if you miss your due dates, which are not suggestions incidentally.  And, if you miss payments on your student loans they may show up on each of the loans, which in the aforementioned example can mean 4 late payments on your credit reports for missing one due date.

Bankruptcy, which is a huge problem for the under 25 crowd, isn’t an option if you have Federally guaranteed student loans.  Those types of loans are not statutorily dischargeable.  So while you may be able to legally protect yourself from your credit card issuers, you won’t be able to protect yourself from your student loan lenders.  This means you will have to either pay your debts, or die with your debts.  You don’t have those limited options with any other type of consumer loans.

Further, defaulted student loan debts don’t have to follow the same rules as far as credit reporting.  Most consumer defaults can remain on your credit reports for no longer than 7 years.  However, defaulted student loans can remain on your credit reports for 7 years from the date they’re paid.

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And finally, defaulted on a Federally guaranteed student loans can negatively impact your access to programs like FHA and VA loans.  And, the government can seize tax returns, attach Social Security benefits, and even garnish wages.  Point being, Uncle Sam is going to get his money back.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.