Essential Insights
- For the initial time, federal student loan borrowers might witness a reduction in their credit scores as a result of non-payment, a scenario that hasn’t occurred since the halt of student loan payments during the COVID-19 pandemic.
- Following the pandemic, missed or late payments have not been communicated to credit rating organizations, and wages have not been subjected to garnishment.
- Borrowers are classified as delinquent after failing to make a payment, yet loan servicers only notify national credit bureaus of this delinquency after 90 days of non-payment.
- Those experiencing financial difficulties can choose more adaptable income-based repayment options or request deferment.
A significant number of federal student loan borrowers may face the adverse effects of non-payment on their credit scores for the first time in almost five years, and this impact could endure for several years.
The COVID-19 repayment freeze granted numerous borrowers a grace period for repayment. Following the conclusion of the pause in September 2023, the Department of Education rolled out a transitional strategy to assist borrowers in adjusting to repayment, but this initiative will wrap up in October.
Throughout this period, missed or late payments were not reported to credit rating organizations, and wages were not garnished—until now. If borrowers fail to make payments starting in October, their credit reports may be influenced this month.
Borrowers are identified as delinquent after failing to make a payment, but loan servicers only relay this delinquency to national credit bureaus after 90 days of non-payment. Once recorded, the delinquency will remain on the borrower’s credit report for seven years. This may complicate the process of acquiring new credit cards or mortgages and could elevate the interest rates on other loans that borrowers seek.
I urge anyone encountering late payments or challenges to contact their lenders to investigate feasible alternatives and identify the most suitable options for their individual circumstances, whether they are short-term or long-term,” stated Betsy Mayotte, head of the Student Loan Advisors Association.
How Borrowers Can Prevent Credit Harm
If borrowers find themselves unable to make prompt loan repayments or facing difficulties with upcoming payments, they can apply for income-driven repayment plans (IDR) to lessen their payment obligations. The Department of Education has recently reinstated two IDR options that provide lower payments compared to standard repayment plans. Expert Suggests Bitcoin is Pausing, Not Plunging
For those borrowers who still find it challenging to meet payments under an IDR plan, they can seek a forbearance from their loan servicer. This will temporarily delay loan repayments until the borrower is in a position to resume payments.
“I believe that if you are already on the most economical plan but still cannot manage your monthly payments, you should think about applying for a forbearance or deferment to ensure you don’t have to make payments in the upcoming months and can regain financial stability,” remarked Sabrina Calavans, executive director of the Student Crisis Center.
Since October, the majority of borrowers who have not made payments have until June before their loans are classified as default. In the event of a default, borrowers may encounter repercussions such as tax offsets or wage garnishments, along with additional harm to their credit histories.
“I’ve talked to some borrowers who, feeling powerless or exasperated, express, ‘Well, I’m just not going to pay. I’ll default. I don’t mind them garnishing my wages,'” Mayotte mentioned. “That’s a very unwise decision. For those who claim, ‘I can’t even afford the minimum income-driven plan,’ the amount deducted from wages will surpass what you would owe under the income-driven plan.
