Student Loan Debt Settlement: Impact on Your Credit Score

Student loan debt settlement should only be pursued if you feel it is the last option before declaring bankruptcy. Debt settlement companies often entice desperate borrowers with promises their obligations to pay will be drastically reduced and their stress will disappear with that obligation. However, settling debt is breaking a contract. Doing this with a student loan will ultimately make you a less able borrower on future debts like your mortgage.

Debt Settlement and Credit Score

Your current lender may agree to settle your debt, but the lender will be losing money, so it will do so begrudgingly. The lender will report you to the credit bureaus. The debt will not registered as paid in full; instead, it will register as unsatisfactorily closed. Your score will drop, and future lenders will see that you were unable to meet your debt obligations.

Student Debt Settlement

The negative impact of a settlement is exaggerated when the settlement is carried out early in a borrower's financial career. Your student debts are likely the first major loans you will take in your life. Settling this early debt means you will have a credit problem on all future loans, including your next big loans like your mortgage. If you settle later in life, after you have paid off multiple mortgages and car loans, you will see a much smaller penalty.