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Student loans don’t just help you pay for your college education. They also allow you to build a credit history, which can be useful when it comes time to get a mortgage or take out a car loan. The key, though, is to make regular on-time payment – or you may wind up with the sort of credit history that negatively impacts your ability to borrow money in the future.

Here’s a look at how student loans can affect your credit score.

How Is My Credit Score Calculated?

First, it can be helpful to know how your credit score is calculated. There are several types of credit scores, but FICO scores are the most commonly used by top lenders.

Your FICO score is calculated using five categories of data found in your credit reports, which each category weighted differently.

Based on these calculations, there are a few ways you can build good credit and maintain a good credit score. Paying your bills on time is a big one, since your payment history is the most heavily weighted factor. Paying down existing debt and keeping credit card balances low will also have a big effect. Less impactful, but important strategies, also include diversifying the types of credit you have, avoiding opening too many new accounts at once, and keeping accounts open to lengthen the average age of your credit history.

What Student Loan Factors Affect My Credit Score?

Now that you know how credit scores generally work, you might be wondering how your student loans specifically impact your score.

Again, one of the biggest ways your student loans can affect your credit is whether or not you pay them on time. If you’re a responsible borrower who continually makes on-time student loan payments, you will see positive shifts in your credit score over time.

But if you fail to repay a loan or continually make late payments, your credit score will likely see a dip. If you default on your student loan, your credit score could drop significantly. The lender may also send your account to a collections agency, and you may have a more difficult time securing credit in the future.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

How Does a Late Student Loan Payment Affect My Credit Score?

Making payments on time is important, but what you might not realize is exactly how damaging late payments can be. Even if your credit history is pristine, it only takes one report of 30 days past due to change your score. Once a late payment is reported to the credit bureaus, it could remain on your credit report for up to seven years.

To help ensure your payments are on time, you might want to set up an automatic payment plan. Most lenders will even give you a small discount on your interest rate for doing so. If you know you can’t make a payment on time, talk to your lender or loan servicer right away. The Department of Education, which is the lender for four types of Direct Loans, and even some private lenders, offer loan deferment or forbearance. These options allow a borrower to temporarily suspend payments, which will minimize the impact on their credit score.

Does It Hurt to Pay Off Student Loans Quickly?

Repaying student loans quickly will always improve your credit score, right? Not necessarily. In fact, you could even see a small, temporary dip in your credit score right after paying off a loan. There are several reasons for this. If student loans are your primary source of open credit, closing those accounts means you’re no longer building payment history. Prematurely paying off a loan can also change your credit mix or credit utilization.

But credit score is just one factor to consider when deciding how quickly to pay off a student loan. You may want to think about how much extra interest you’d pay by leaving the account open. Carrying a high loan balance could also make it harder to qualify for new loans, which is something to keep in mind when it comes time to buy a home or car.

Notorious Big Bad D’s: Delinquent and in Default

Student loans affect credit scores in a variety of ways, but the worst thing you can do is ignore your monthly loan payment. If you’re even one day late with a payment, you’ll be considered delinquent and may be charged a penalty.

Once a missed payment is more than 90 days delinquent, your loan servicer will report it to the three major national credit bureaus. This could lower your credit score and hurt your ability to get a new credit card or qualify for a car loan or mortgage.

After 270 days of a missed student loan payment, your status changes to default and your student loans are due in full along with any accrued interest, fines, and penalties.

(Note that the on-ramp that’s in place for federal student loan repayment from October 2023 through September 2024 temporarily shields borrowers from the most immediate consequences of delinquency and default.)

Will Rate Shopping Different Student Loan Lenders Hurt My Credit?

When you’re shopping around for the best interest rate possible on a private student loan, lenders may pull your credit file. This is called a hard inquiry, and each one could temporarily knock a few points off your credit score.

To help protect your FICO score, try to finish shopping for rates and finalizing your loan within 30 days. Researching rates and getting quotes ahead of time can give you a good idea of whether you’ll qualify for a loan before you formally apply.

You may also want to ask lenders if they can tell you the interest rate you would receive without doing a “hard” credit pull, which might affect your score. You can’t get a loan without an eventual hard inquiry, but getting prequalified allows you to compare interest rates without impacting your credit score.

Will Refinancing Student Loans Help My Credit?

Because refinancing involves taking out a new loan with new terms to pay off existing debt, refinancing student loans affects your credit score—both positively and negatively.

In the short-term, refinancing will involve a hard credit inquiry and may cause a temporary ding to your credit. Again, as long as you keep your loan shopping to a short period, multiple inquiries will be treated as one, and should have a minimal impact on your score.

In the long-run, refinancing student loans at a lower interest rate can have an indirect positive effect on your credit. For example, if refinancing lowers the amount you pay each month, you may be more likely to make payments on time. You may also pay off your loans faster, which can help you reduce your overall debt and improve your score. (Note: You may pay more interest over the life of the loan if you refinance with an extended term.)

If you refinance federal loans with a private lender — in effect, turning your federal loans into a private loan — rest assured that credit bureaus don’t view these two types of loans any differently. However, when you refinance your federal loans, you will lose certain federal protections, such as income-driven repayment plans, deferment or forbearance, and loan forgiveness programs.

Do I Need a Good Credit Score to Take Out a Student Loan?

Your credit score may be a factor when you’re applying for a student loan. It all depends on the type of loan you’re planning to take out. Most federal loans don’t have a minimum credit requirement, which is why nearly every borrower gets the same interest rate regardless of their financial profile. However, federal PLUS loans for parents require that borrowers do not have an adverse credit history.

Credit scores are typically more of a factor with private student loans. Lenders often consider your score when determining student loan approval and interest rate. In general, the better your score, the better your rate will be.


💡 Quick Tip: Refinancing could be a great choice for working graduates who have higher-interest graduate PLUS loans, Direct Unsubsidized Loans, and/or private loans.

Which Credit Scores Do Private Lenders Use?

When considering your student loan application, most private lenders look at your FICO® score. This score, which ranges from 300 to 850, helps lenders determine whether to extend credit and at what interest rate.

Because FICO is used widely throughout the lending industry, including by mortgage lenders and credit card providers, it gives lenders an apples-to-apples comparison of potential borrowers.

The Takeaway

Student loans can help borrowers establish a solid credit history, which can ease the way for future borrowing opportunities and attractive interest rates. The key is to pay what you owe on time, every time.

Paying a loan off early or shopping around for rates could cause a small, temporary dip in credit scores. Being late with a payment — or stopping payment altogether — may lower your credit score and hurt your ability to qualify for another loan.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

Do student loans help build credit?

Student loans are an opportunity for borrowers to build credit and establish a solid credit history, which can help when it’s time to get a mortgage or take out a car loan. The key is to make regular, on-time payments.

How can I improve my credit score if I have student loans?

Payment history is one factor of your overall credit score, so making regular, on-time payments on your student loans can help you build credit.

How is my credit score determined?

Your credit score is calculated using five different categories of data. These include payment history, amounts owed, length of credit history, new credit, and credit mix.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SOSL0923044

While on the work grind at the office, you get an email from the HR department, inviting you down to pay them a visit. Uh-oh. What could possibly be up? You’re a rock star on the job, so you cannot imagine what the trouble could be.

The good news: you’re not getting fired. The bad news: they tell you that part of your wages are going to be garnished in order to pay back your outstanding school loans.

What Is Student Loan Wage Garnishment?

Student loan wage garnishment is a tough thing to face; what makes it doubly troublesome is the official letter from the U.S. Department of Education that notifies your employer that a percentage of your paycheck will now go directly to paying back your outstanding student loan balances.

This may be something that would be a big enough bummer when you’re the only one who knows about it. When your employer is let in on the secret, and ordered by the government to reconfigure your paycheck, the awkwardness knows no bounds.

Student loan wage garnishment does not make it easy for you or your employer . Your company’s payroll department generally executes (and sometimes calculates) the student loan garnishment amount, and forwards the payments to the correct agency or creditor. In some cases, your employer can be held liable for the full amount or a portion thereof for failure to comply with the garnishment. This can include interest, court fees, and legal costs.

If it’s any consolation, you would not be alone in this situation. Let’s start with the macro: according to
CNBC , more than one million people default on their student loans each year. By the year 2023, nearly 40% of borrowers are expected to default on their student loans. Outstanding debt in the U.S. has tripled over the last decade and now exceeds $1.5 trillion. That number far exceeds the traditional debt of autos and credit cards.

Now for the micro: according to a study by the ADP Research Institute , 7.2% of employees had their wages garnished in 2013 (the latest research we could find on this). Of that total, 2.9% of those garnishments were from student loan and court-ordered consumer debt garnishment.

Defaulting on your student loan is not ideal. We’re going to share some details on federal student loan garnishment, and how you can avoid defaulting on your loans.


💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

How Does Federal Student Loan Garnishment Work

Your wages can’t be garnished out of nowhere. It starts with your loan becoming delinquent, which happens the first day after you miss a payment. Your loan will remain delinquent until you pay back everything you owe.

If you are more than 90 days delinquent on your payment, your loan servicer reports the missed payments to the three national credit bureaus (Equifax, Experian, and TransUnion). This will negatively affect your credit, as payment history makes up 35% of your score.

Eventually, if you still fail to repay your debt, the government may resort to garnishing your wages and/or withholding your tax refund, which they can do without a court order. Legally, they can garnish up to 15% of your disposable pay. Disposable income is calculated by taking your gross income, and then subtracting your tax obligations and other withholdings such as Social Security, Medicare, state tax, city/local tax, health insurance premiums, and involuntary retirement or pension plans.

The good news is that there is a temporary exception to this process. To help financially vulnerable borrowers transition to making their student loan payments after an automatic, three-year pause that ended in October, the Biden administration implemented an “on-ramp” period. From Oct. 1, 2023 through Sept. 30, 2024, borrowers who miss payments will not be considered delinquent or in default, have missed payments reported to the credit bureaus, or have their loans referred to collections agencies.

Ways To Help Prevent Your Student Loan From Becoming Delinquent

If you are concerned about wage garnishment for your federal student loans, there are proactive steps you can take to keep your account from becoming delinquent in the first place:

Scheduling automatic payments. You can have the monthly obligation automatically and electronically deducted from your checking or savings account.

Building an emergency savings fund. You can save at least six months of backup funds that you can use specifically to make your monthly payments. This may come in handy should you be without income for a time.

Ways To Help Prevent Your Student Loans From Going Into Default

Based on your financial circumstances, there are a few options available that may allow you to make your student loan payments more affordable or even put them on a temporary hold:

Income-Driven Repayment (IDR) Plans: With these plans, your student loan payments are adjusted based on your discretionary income. Depending on the plan you choose, the government typically extends your repayment terms and readjusts your monthly payment, and may eventually forgive the balance of your loan. The newest IDR plan, the SAVE Plan, will provide the lowest monthly payments once it’s fully implemented in July 2024.

Forbearance or Deferment: If making payments is becoming or has become nearly impossible, you can ask your lender to defer your payments or request forbearance. If they agree and you qualify, you can delay your payments and avoid default.

Student Loan Refinancing vs Consolidation

If student loan wage garnishment is the nightmare that comes true, here are two options that may be able to stop it: consolidating or refinancing your student loans. First, know the difference between the two (and it’s a pretty big one):

When you refinance student loans, you’re actually paying off your existing loans with a new loan from a private lender. In this process, you can possibly reduce your payments and make them more affordable. (You may pay more interest over the life of the loan if you refinance with an extended term.) Or you may be able to lower your interest rate. However, you also will lose out on certain benefits that come with federal student loans, like deferment and forbearance, and lose your eligibility for all other federal student loan programs.

When you consolidate your federal student loans with the federal government, you essentially “bind” them all together into one, big loan. Sounds like a plan, but there can be a few downsides; this could result in you paying more in interest over the life of your new, consolidated loan because the interest rate on your consolidated federal loan will be the weighted average of all your loans, rounded to the nearest eighth of 1%. You can also only consolidate your federal loans under a Direct Consolidation Loan, which has its own requirements if you’re already in default, and isn’t available for private student loans.

Consolidating a Defaulted Loan

According to the U.S. Department of Education, if you want to consolidate a defaulted loan, you must make “satisfactory repayment arrangements” on the student loan with your current loan servicer before you consolidate.

If you want to consolidate a defaulted loan that is being collected through garnishment of your wages, or that is being collected in accordance with a court order after a judgment was obtained against you, you may only do so if the garnishment order has been lifted or the judgment has been vacated.

Refinancing Your Student Loans

You may be able to combine your private and federal loans into one brand-new, private refinanced loan.

You may be a good candidate for student loan refinancing if you have a steady income, a consistent history of on-time debt payments, and you don’t have need for federal student loan benefits—among other important personal financial factors. (When you refinance your federal loans with a private lender, you can no longer access any federal loan benefits.)

A lender will most likely offer you a few choices for your refinanced student loan: fixed and variable interest rates, as well as a variety of repayment terms (this is often based on your credit history and current financial situation). If you qualify for refinancing, your new loan should (hopefully) come with a new interest rate or a new loan term that can lower your monthly payments.(You may pay more interest over the life of the loan if you refinance with an extended term.)

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SOSL0923054

There are a variety of reasons why a law student may consider transferring schools. Maybe you don’t love the professors or environment, the city isn’t a fit, the tuition is too high or you need to relocate for personal reasons. Whatever the reason, transferring schools is a big decision that shouldn’t be taken lightly.

While you are at your current school, focus on your grades and rounding out your resume. These are two factors admissions officers may evaluate when you apply to transfer. Continue reading for a guide on how to make a transfer happen and what you should consider before choosing to make the move.

What Is a Law School Transfer?

Typically, completing law school takes three years of full-time study. A law school transfer involves switching from one law school to another while pursuing a JD. In most cases, transfers take place after a student completes their first year of law school, commonly known as their 1L year.

It is possible to transfer after your second year, but this is less common because credits taken during your 2L year may not transfer.

What to Consider Before You Transfer Law Schools

Switching law schools involves a lot of work and some trade-offs. Here are some questions to ask yourself before you take the leap:

Is the new law school ranked significantly better than your current one?

If you’re looking to change schools in order to upgrade to a better one, make sure it’s worth the trouble. A school that’s ranked only slightly better or falls within the same tier won’t change your job prospects very much, and what you sacrifice could eclipse any benefits. Aim to jump to at least the next tier of law schools. If you’re already in the top tier, you may want to focus on just the top five schools.

Will a “better” school be right for you?

When you move to a higher-ranked school, you may see your grades fall or feel stressed because of stiffer competition. You may get less personalized attention from faculty and administrators and have a harder time getting to the top of the list for institution-based law school scholarships and internships. Setbacks like these aren’t guaranteed, and you can certainly bounce back, but make sure you think through the move carefully and get to know your prospective institution well.

Are you willing to put in the work?

Applying as a transfer student requires pretty much the same amount of time and effort as applying to law school the first time. You’ll also have to pay application fees of up to around $100 per school.

Are you OK with potentially losing out on opportunities?

When you change schools, you may have to give up scholarships, the chance to study abroad, or the opportunity to participate in the law review or moot court. You will also have to give up your first-year grades (you don’t bring them with you to the new school).

Can you deal with setbacks in your relationships?

When you transfer, you might lose the bonds and connections you’ve started forming during your first year.

Conversely, many of the students at your new school will have formed strong friendships as well, so you might have a harder time breaking in. Considering the importance of networks in career advancement, this could affect not only your personal life, but also your professional future.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

How to Complete a Law School Transfer

Most students transfer after their first year, which allows them to receive a degree from their new school with no mention of the original institution. Many schools will not allow you to transfer after your second year, or if they do, they’ll still require you to attend two additional years at the new school.

Applying for a transfer looks very similar to applying for law school in the first place. Generally, you’ll need to submit:

•   A résumé

•   A personal statement

•   Two letters of recommendation

•   Transcripts

•   LSAT or GRE scores

Preparing Your Application

Applying to transfer does not guarantee that you’ll be admitted. Your GPA and class rank are usually the most important factors in your application and are weighed more heavily in transfer decisions than your LSAT score and extracurricular activities.

Most schools will only admit transfers that are in the top 10% of their class. Your class rank must be even higher if your school is ranked relatively low. To improve your chances, focus on getting good grades in your first year. You should also start early on building relationships with professors who might offer recommendations by reaching out to them, attending office hours, and speaking up in class.

A law school transfer personal statement must focus not only on why you want to study law in general but also on why you want to transfer. The reason you cite should be substantive and tied to the institution you want to attend, rather than a purely personal motive, such as being closer to family.

Don’t just cut and paste the essay you submitted when applying to law school initially, and don’t turn in a generic statement. Instead, tailor the essay to the school you want to transfer to, and why they are the right fit for you. Steer clear of trash-talking your current law school — that doesn’t look good to the admissions committee. Instead, speak in positive terms about what you’ve gained and accomplished, and make clear what contribution you would make to the school if you were accepted.

What Are Admissions Officers Looking at in a Transfer Application?

The exact criteria an admissions committee evaluates may vary based on the law school. However, there are commonalities that admissions officers evaluate and opportunities for you to strengthen your application as a law school transfer. Some of the top criteria evaluated include grades, letters of recommendation, résumé, and your personal statement.

•   Grades. The grades you earn during your 1L year can illustrate how you’ll perform in future years of law school. As mentioned, LSAT scores will still likely be a factor, but may fall in importance after completing 1L classes.

•   Letter of recommendation. This can help the committee understand how you performed in your 1L classes and any other criteria that could help you stand out from other applicants. Think carefully about which professor may be the best fit to write a letter on your behalf and be open about your reasons for wanting to transfer.

•   Resume. The admissions committee will also likely evaluate any law-related extracurriculars you participated in during your 1L year.

•   Personal Statement. The personal statement is an opportunity to explain why you are interested in transferring in addition to why you want to pursue a law degree and how it will influence your future career plans.

What to Do if Your Transfer Is Accepted

If you’re admitted as a transfer student, congratulations! Once you’ve committed to switching schools, you’ll need to take care of a number of things to ensure a smooth transition. First, inform your current school of your plans to transfer (and tell your landlord if you’re moving). Next, get in touch with your new school to confirm which of your credits will be transferred, and take careful note of all the classes you need to earn your degree.

You will also want to reach out to the financial aid office to make sure your package is squared away. And don’t forget to contact career services to connect with your advisor and sign up for on-campus interviews and other opportunities. If you’re moving, you’ll need to get set up in a new apartment. Once you’re at your new school, work extra hard to build relationships with professors and peers. These will pay off in terms of future recommendation letters and lifelong networks.

How Student Loan Refinancing Can Help

As a lawyer-in-training, you’re probably on track to make a good living once you graduate. But in the meantime, law school can be an expensive endeavor. That high price tag, especially when combined with the cost of undergraduate education, is one reason why law school students can expect to graduate with more than $100,000 in student debt. In fact, According to a 2020 survey conducted by the American Bar Association (ABA) Young Lawyers Division and AccessLex Institute, median cumulative student loan debt was $160,000.

Maybe you are looking to transfer because your current law school is too expensive, or maybe you’re upgrading to a higher-ranked school that also comes with higher costs. Either way, student loan refinancing can help get your law school debt under control.

What Is Student Loan Refinancing?

Student loan refinancing involves getting a single new loan from a private lender to pay off one or more existing student loans. Your new loan comes with a single payment, and potentially, a different interest rate and repayment term. You can refinance both federal and private loans. However, if you refinance federal loans, you permanently forfeit all federal protections and benefits such as income-driven repayment plans, deferment and forbearance options, and Public Service Loan Forgiveness (PSLF).

Lenders will usually evaluate factors such as your credit score, credit history, and income, among other personal factors to help determine the loan terms. It is possible to refinance student loans with bad credit, but this can be more challenging or result in a higher interest rate or less favorable terms. That’s why some borrowers may consider adding a cosigner to strengthen their application.

Refinancing without a cosigner is also an option. Borrowers with limited history or low credit scores may want to spend some time building credit before refinancing if they do not want to rely on a cosigner.

The question is, should you refinance your student loans? The answer is deeply personal, but being an informed consumer can help you make the decision. A major draw of refinancing is to secure a more competitive interest rate, which could help you save money over the life of the loan. You can get an idea of how refinancing can influence your loans by using SoFi’s student loan refinance calculator.

If you think refinancing may be a fit for you, shop around and compare terms to find the best rates and terms available to you. On your way, consider refinancing student loans with SoFi.

Recommended: Guide to Establishing Credit

The Takeaway

There are a lot of reasons students may want to transfer law schools. Typically, this happens after a student has completed their 1L year. Admissions committees will generally evaluate factors including a student’s 1L grades, letters of recommendation, their resume, any law-related extracurriculars, and the student’s personal statement, among other factors as determined by the school.

Nearly 90% of law students graduate with student loan debt. Student loan refinancing might be right for you if you have good credit and could potentially qualify for a lower interest rate. Keep in mind that if you refinance federal loans, you give up the opportunity to take advantage of income-based repayment plans or federal relief offerings such as deferment or forbearance. You can consider refinancing your undergrad loans while in law school, or once you have a steady job after law school, you can refinance your undergrad and law school loans.

You may also consider taking out a private student loan with SoFi to finance the rest of your law school experience. SoFi offers flexible repayment plans and a quick application with no fees.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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If you dread your student loan payments each month because you aren’t sure whether you can afford to cover the minimum payment, know that there are solutions to make student loans more manageable. One option is hiring a student loan consultant to help create a customized repayment plan.

While some borrowers might find their advice valuable, either might find it’s not worth the expense – especially if they’re already struggling to find a way to make their loan payments. Here’s what you should keep in mind if you’re thinking of working with a student loan consultant.

What Is a Student Loan Consultant?

Americans owe nearly $1.8 trillion in collective student loans. As student loan debt has increased, student loan consultants have emerged to help students navigate the loan process. Most student loan consultants work independently from colleges or universities, and are not affiliated with specific repayment programs. Student loan consultants work one-on-one with borrowers to identify their repayment needs and try to set them up on a path of debt payoff success.

Knowing What They Can Help With

There are five main ways a student loan consultant can help you:

•   Recommending a student loan repayment strategy

•   Offering personalized guidance specific to your finances

•   Explaining student loan jargon

•   Researching your loan details

•   Communicating with lenders on your behalf

Before seeking out a student loan consultant, it might be helpful to identify your specific needs. If you don’t understand the difference between consolidation and refinancing, for example, then talking with a consultant about student loan jargon could be helpful.

If calling lenders sends you into a panic, maybe that’s where you want the consultant’s help. And if you’re struggling to make your minimum monthly payments, you could potentially talk to a consultant about finding a better student loan repayment plan.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

Understanding What You’re Paying For

The cost of a student loan consultant can vary widely, and can come in the form of an hourly fee, flat rate, or annual fee. You could expect to pay anywhere from as little $50 to upwards of $600 or more for help from a student loan counselor. Making sure their services are worth the money you are paying is important, of course, and that can be done by confirming that their services aren’t something you could do on your own—like finding a federal income-driven repayment plan (which we’ll get into below). It’s also important to ensure that the cost doesn’t prevent you from making your student loan payments.

Before speaking with a consultant, finding out what is possible and what sounds too good to be true can help you weed out any scammy student loan consultants. And when you’re trying to understand what you can do on your own (without a consultant’s help), a good place to start is the Consumer Financial Protection Bureau .

Knowing What Programs Are Available for Free

A fair number of programs to help with student loan payments are available to everyone, without a fee. For example, before seeking out a student loan consultant, you could look into enrolling in a federal income-driven repayment (IDR) plan.

Typically, when you graduate from college or reduce your attendance to under half-time, you’re automatically put on the 10-year Standard Repayment Plan. However, borrowers looking to reduce the monthly payments on their federal student loans may qualify for an IDR plan, which reduces your monthly payment to a small percentage of your discretionary income and extends the repayment term up to 25 years (the exact details depend on the specific plan you choose). After the repayment period is up, any remaining balance is forgiven (but may be subject to taxes).

The newest IDR plan, Saving on a Valuable Education (SAVE), caps monthly payments at 5% to 10% of your discretionary income and shields more of your income from the payment calculation compared to older plans. It also forgives student loan debt as soon as 10 years into repayment for borrowers with smaller starting balances.

Because these repayment plans extend your loan term, you may pay more interest over the life of your loan. Even so, it could bring much-needed immediate relief and result in some loan forgiveness.


💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.

Asking a Neutral Party for Help

If you have a conflict regarding one of your federal student loans, you can ask for help from the Federal Student Aid Ombudsman Group , which serves as a neutral party. They can resolve discrepancies with loan balances and payments, and help identify loan repayment options. You can also try to resolve the dispute before contacting the Ombudsman Group. Or you can file a complaint through the Consumer Financial Protection Bureau.

Considering a Nonprofit Credit-Counseling Agency

The National Foundation for Credit Counseling can help you find a qualified credit counseling agency, which can aid you in creating a budget and even negotiating a new payment plan with creditors. The U.S. Department of Justice also offers an online database of credit-counseling agencies .

Making Sure the Consultant Isn’t Providing a Redundant Service

It’s important to make sure the consultant’s service isn’t something you could do on your own. For example, you could lower your monthly payment on your federal student loans by opting for an income-driven repayment plan without paying a consultant for their services.

You can also consider consolidating your federal loans through a Direct Consolidation Loan, which is also free. A Direct Consolidation Loan allows you to combine all of your federal loans into one, and gives you a new interest rate that’s a weighted average of your current interest rates, rounded up to the nearest eighth of a percent. While you won’t have a lower overall interest rate, you could lower your monthly payments and simplify the repayment process.

Refinancing Your Student Loans

If you’re looking for alternative ways to pay off your student loan debt, you could also consider student loan refinancing. When you refinance your student loans, you take out a new loan with a private lender and then use the proceeds to pay off one or more existing student loans. Ideally, the refinanced loan has a better interest rate and terms.

Extending your loan term through refinancing can lower your monthly payments. But it does mean paying more in interest over the life of the loan.

Alternatively, refinancing to a lower interest rate and shorter loan term could cost you less in interest over the life of the loan and help you pay it off faster. Keep in mind, however, that refinancing with a private lender means you’ll no longer be able to access federal loan benefits like income-driven repayment plans.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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It could come as a dreaded envelope in your mailbox, or as a call from an unknown number you’re afraid to take. Whether you’re receiving calls or mail from a debt collector or are going out of your way to avoid either (or both!), you’ll probably want to know: What is a debt collection agency, and how does it work?

How Do Collection Agencies Work?

At their most basic, debt collection agencies exist in order to try to get borrowers to pay their overdue debts. Debt collection companies make money by buying debt from lenders, often for pennies on the dollar, and then attempting to get the original amount owed from the borrower.

A bill that’s 30 days past due is otherwise known as a delinquent account. Lenders and creditors have some leeway when they report overdue debts to credit bureaus. For borrowers who continually miss payments, a lender may report a missed payment right at the 30-day mark. But for a borrower who has a positive repayment record, a lender might allow a few missed payments before reporting it to the credit bureaus.

A debt is typically not sent to a collection agency until several months have gone by and your lender no longer wants to put effort into collecting the debt from you. Instead, the lender might either enlist an agency that is hired to collect third-party debts or sell the debt to a collection agency. Once the debt has been sold to a debt collection agency, you may start to get calls and/or letters from that agency.

You may be wondering what a collection agency can do to you. The debt collection industry is heavily regulated, and borrowers have many rights when it comes to dealing with bill collectors. Debt collectors are allowed to try to get you to pay, but they are restricted by the Fair Debt Collection Practices Act (FDCPA), which prohibits them from harassing you or lying to you in order to collect your debt. Despite this, debt collectors will try everything in their power to get you to pay your old debt.


💡 Quick Tip: With average interest rates lower than credit cards, a personal loan for credit card debt can substantially decrease your monthly bills.

What Is a Debt Collector?

A debt collector can be either an individual person or an agency. In either case, their task is to collect overdue debts from those who owe them. Sometimes referred to as collection specialists, an individual debt collector may be responsible for many accounts. They may be paid a base salary plus commission, so they have a high incentive to convince the debtor to pay.

What Do Collection Agencies Do?

Debt collection agencies are hired by creditors and are generally paid a percentage of the amount of the debt they recover for the creditor. The percentage a collection agency charges is typically based on the age of the debt and the amount of the debt. Older debts or higher debts may take more time to collect, so a collection agency might charge a higher percentage for collecting those.

Some agencies may also charge a flat fee for collecting a debt. Others work on a contingency basis and only charge the creditor if they are successful in collecting on the debt.

The debt collection agency enters into an agreement with the creditor to collect a percentage of the debt — the percentage is stipulated by the creditor. One creditor might not be willing to settle for less than the full amount owed, while another might accept a settlement for 50% of the debt.

When the debt is collected, the agency takes its payment from the amount paid and sends the remainder to the creditor.

Recommended: What Are the Common Uses for Personal Loans?

How is this different from a debt buyer?

The main difference between a debt collector and a debt buyer is the stage the debt is with the creditor. If a creditor is still trying to collect a debt, either on its own or through a debt collection agency, the debt is considered to be a current debt. But if a creditor has given up trying to collect a debt, they may write off — or charge off — the debt, no longer expecting it to be paid.

A debt collector is hired by the creditor to attempt to collect what is owed on the current debt by the debtor.

A debt buyer, in comparison, doesn’t work for the creditor like a debt collector does. They buy debts that have been charged off by creditors, sometimes buying a collection of old debts from a single creditor. They may pay very little for the debt, sometimes just a few cents of what was originally owed. Debt buyers then attempt to collect the debt, sometimes using aggressive tactics.

The debt buyer buys only an electronic file of information, often without supporting evidence of the debt. The debt is also generally very old debt, sometimes referred to as “zombie debt” because the debt buyer tries to revive a debt that was beyond the statute of limitations for collections.

How to Deal With a Debt in Collections

Debt collection agencies may contact you either in writing or by phone.

If your first instinct is to hang up when you get a phone call from a debt collector, you’re not alone. But not talking to them won’t make the debt go away, and they may just try alternative methods to contact you, including suing you. When a debt collector calls you, it’s important to get some initial information from them, such as:

•  The debt collector’s name, address, and phone number.

•  The total amount of the debt they claim you owe, including any fees and interest charges that may have accrued.

•  The date the debt was incurred and who it was originally owed to.

•  Proof they have that the debt is actually yours.

The debt collector must let you know that you have the right to dispute the debt and how to do so. If they don’t say this in their first contact with you, they must notify you of your right to dispute within five days of their initial contact with you. Under the FDCPA, a debt collector must send a debt validation notice, which must include certain information.

•  The letter must state that it’s from a debt collector.

•  Name and address of both the debt collector and the debtor.

•  The creditor or creditors to whom the debt is owed.

•  An itemization of the debt, including fees and interest.

They must also inform you of your rights in the debt collection process, and how you can dispute the debt.

•  If you don’t dispute the debt within 30 days of their first contact with you, they’ll assume the debt is valid.

•  If you do dispute the debt within 30 days, they must cease collection efforts until they provide you with proof that the debt is yours.

•  They must provide you with the name and address of the original creditor if you request that information within 30 days.

The debt validation notice must include a form that can be used to contact them if you wish to dispute the debt.

The FDCPA ensures that consumers aren’t harassed during the collections process. Some things debt collectors cannot do are:

•  Make repeated calls to a debtor, intending to annoy the debtor.

•  Threaten physical violence.

•  Use obscenity.

•  Lie about how much you owe or pretend to call from an official government office.

How Does a Debt in Collections Affect Your Credit?

Generally, unpaid debt is reported to the credit bureaus when it’s 30 days past due. If payments continue to be missed, additional late payments will be reported, and with each missed payment, your credit is likely to be negatively affected.

If your debt is transferred to a debt collector or sold to a debt buyer, an entry will be made on your credit report. Each time your debt is sold, if it continues to go unpaid, another entry will be added to your credit report.

Each negative entry on your credit report can remain there for up to seven years, even after the debt has been paid. This, of course, will likely affect your credit score. Higher credit scores may take a greater hit than lower credit scores.

A late payment or collections entry on your credit report could lower your credit score by as much as 110 points, a debt settlement entry could lower it by as much as 125 points, and a bankruptcy could lower it up to 240 points.

Recommended: How to Check Your Credit Score for Free

Alternatives to Debt Collection Agencies

You have options when it comes to dealing with your debt. Here are a few you may want to consider.

Credit Consumer Counseling Services

With credit consumer counseling services, you may be paired with a trained credit counselor who works with you to develop a debt management plan. Generally, counselors don’t negotiate a reduction in debts owed, but they could help lower monthly payments by working to increase the loan terms or lower interest rates. A plan may require you to make a single monthly payment to the agency, which then makes monthly payments to all of your creditors.

The credit counselor can also provide guidance on your money and debts, work with you to create a budget, and even offer free workshops or financial literacy materials.

Many agencies are nonprofit and offer counseling services for free or at a low cost. To find a nonprofit agency that’s certified by the Justice Department, you may want to start with this list.

Debt Settlement

Debt settlement is where a third-party company negotiates with your creditors or debt collectors on your behalf to try to reduce your debt.

Paying off less debt might sound like an easy win, but debt settlement can come with some big financial risks, possibly affecting the debtor’s credit score and ability to access credit in the future, and costing more along the way. Plus, creditors are under no obligation to accept a settlement proposal, and not all creditors will negotiate with a debt relief company.

Instead of paying a company to negotiate on your behalf, you can try talking directly to your creditors for free. While creditors may not reduce your debt, they may be open to negotiating for a lower rate or offering a modified payment plan so your payments are more manageable.

Debt Consolidation

If you have multiple, high-interest debts, you may choose to consolidate them into a new, single personal loan. Ideally, this new loan has a lower interest rate or more favorable terms to help streamline the repayment process.
Personal loans are often unsecured, which means no collateral is required to secure the loan. They can have fixed or variable interest rates, but it’s usually easy to find a lender that offers fixed-rate personal loans.

Note that some loans come with origination fees, which can add to the total balance you’ll have to repay. You may also be charged with late fees, prepayment penalties, or other fees. Make sure you understand any fees or penalties before you sign the loan agreement.


💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options, and no surprises.

The Takeaway

If you’ve received a phone call or letter from a debt collector, it helps to understand how debt collection agencies work and how to deal with a debt in collections. Avoiding a collector won’t make your debt disappear — it’s better to get all the information you can from the debt collector to help you make informed choices as you go through the collections process or dispute the debt. And if you’re having trouble managing multiple high-interest debts, remember there are options available to help get control of your finances.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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