If a borrower defaults on a loan that is under an income-driven repayment plan, what is the likely credit impact?

If a borrower defaults on a loan that is under an income-driven repayment plan, what is the likely credit impact?

• A. No impact on credit score.
• B. Positive impact on credit.
• C. Mixed impact depending on payment history.
• D. Major negative impacts on credit.

Answer: (D)

Payment history is the most influential factor in a credit score, so defaulting on a loan signals a major failure to repay. Even if a borrower is on an income-driven repayment plan, missing enough payments to reach default makes the loan status deleterious and is reported to credit bureaus as a default. That default causes a significant drop in the credit score and can remain on the credit report for up to seven years. So the likely credit impact is major negative. The other choices don’t fit because default is a strong negative signal, not no impact, not a positive signal, and not a typically mixed outcome.

Payment history is the most influential factor in a credit score, so defaulting on a loan signals a major failure to repay. Even if a borrower is on an income-driven repayment plan, missing enough payments to reach default makes the loan status deleterious and is reported to credit bureaus as a default. That default causes a significant drop in the credit score and can remain on the credit report for up to seven years. So the likely credit impact is major negative. The other choices don’t fit because default is a strong negative signal, not no impact, not a positive signal, and not a typically mixed outcome.