How Does Student Loan Discharge Affect Credit?

by Helen Akers, Demand Media
    Student loan lenders report your payment activity and outstanding balance to the three major credit bureaus.

    Student loan lenders report your payment activity and outstanding balance to the three major credit bureaus.

    Just like a few bad grades on pop quizzes aren't permanent marks against your grade point average, a student loan discharge or two aren't bad for your credit. If anything, they are better than defaults. Both mean you're no longer paying back the loan, but a default means you failed to hold up your end of the deal. When you default, your lenders still expect you to pay, and they will report your lack of payment to the credit bureaus. A discharge means something happened beyond your control and it will only damage your credit report if you fail to follow certain procedures.

    Getting the Discharge

    Lenders are willing to forgive your loan balances under extreme circumstances that are not your fault. Some of those circumstances include permanent disability, your school closing prior to degree completion, your signature being forged on the application, or the school admitting you under false pretenses. You won't be off the hook if you file for bankruptcy, unless you're able to prove that making payments on your loans would cause you undue hardship. While the lender may remove the default status from your credit report, a bankruptcy will remain for seven years.

    Pre-Approval

    Until the discharge application is approved, you're still responsible for anything you own on the loan. The lender will let the credit bureaus know about any interruption in expected payments regardless of any appeals you have in progress. This can negatively affect your credit report and possibly result in the denial of new credit. A negative payment history could also discourage some employers from offering you a job.

    Approved Discharges

    Even if the lender grants a full cancellation, some negative information can still slip into your credit report. If the loan was previously in default, any late payment history and default status will usually be removed. You may also be eligible for a full or partial refund of your loan payments. Credit bureaus can sometimes make mistakes, so request copies of your report from all three agencies as part of your follow-up. If the lender does not report the loan as discharged, you have the right to file a dispute to correct the information.

    Partial Forgiveness

    As of 2012, the Federal government has programs to forgive some student loan debt for public employees, including teachers in low-income schools. Under the Public Service Loan Forgiveness Program, you must make 120 consecutive payments toward your outstanding loan balance. At the end of 10 years, any outstanding balance is forgiven. As long as you make full payments on time, the discharge of your outstanding balance will not raise any issues on your credit report.

    About the Author

    Helen Akers specializes in business and technology topics. She has professional experience in business-to-business sales and as a technical support specialist. Akers holds a Master of Business Administration with a marketing concentration from Devry University's Keller Graduate School of Management.

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