The federal student loan pause that's been in place for the last three years is set to end on Aug. 30. Millions of borrowers will have to resume making payments come autumn, which might not be easy given that inflation has made everything more expensive these days.
But if you fall behind on your payments, your credit score could take a serious hit. Here's what you need to know about how your student loan debt affects your credit and what you can do to avoid problems.
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How student loan debt affects your credit
The credit bureaus treat student loans like any other loan. They keep track of how much you owe and your payment history, and they provide this information to lenders who request information about your credit.
Several factors make up your credit score, but payment history is by far the most important. It accounts for about 35% of your FICO score, which is the model most commonly used by lenders. Even one late payment could drop your score by tens or even hundreds of points. And a lower credit score affects how difficult it is to obtain loans and credit cards in the future and the interest rate you'll qualify for.
But there's no need to panic if you're only a day or two late. Private student loan lenders typically don't notify the credit bureaus that you're behind on your payments until you're at least 30 days late, and federal student loans won't do so until you're at least 90 days late. However, you could still incur late fees before this. Private lenders may charge you if you're even a day late while federal student loan borrowers usually don't have to worry about late fees until they're at least 30 days behind.
If you're able to catch up before your student loan lender reports your late payment to the credit bureaus, it shouldn't affect your credit score. But once the credit bureaus know about it, expect your score to take a dip. Typically, those with higher credit scores see bigger drops than those who already had a lower score to start with. But regardless, it's not going to do you any favors the next time you need to borrow money.
Paying what you owe and getting your account current again will help you avoid further late fees. But it won't remove the late payment from your credit report. However, you still want to try to catch up on your payments so you can avoid defaulting on the loan.
Defaulting happens when you're at least 270 days behind on your payments. This causes the entire balance of your loan, including late fees, to come due. Lenders may pursue legal action against you and could even seize your wages and/or tax refund in order to recoup what you owe.
The only way to put a stop to this is to rehabilitate your loan, though this may not be an option with private student loans. Federal student loan rehabilitation is a one-time offer that enables you to get your loan back to current status by making nine consecutive on-time payments within 10 months. Your lender will determine what your payments will look like. If you're able to do this, the lender will stop garnishing your wages and tax refunds and it'll expunge the default from your account.
What to do if you don't think you can keep up with your student loan payments
Obviously, you want to avoid late payments whenever possible. If you're worried about forgetting payment due dates, see if you can enroll in autopay so you don't have to make payments manually.
But often, late payments happen because people have fallen on hard times and don't have the cash they need to keep up with the bills. In that case, it's best to speak to your lender about the options available to you before you fall too far behind. Federal student loans offer options like:
- Income-driven repayment plans: Income-driven repayment plans base your monthly payments on your current discretionary income to help them better fit into your budget.
- Deferment: Though the federal student loan deferment is ending, you could still qualify for student loan deferment if you're unemployed or experiencing financial hardship, among other things. Interest doesn't accrue on your balance during deferment.
- Forbearance: Forbearance is similar to deferment in that it temporarily relieves you of the need to make payments. But interest accrues during forbearance, so you'll owe more overall if you do this.
- Student loan forgiveness: This forgives your remaining student loan debt after a certain amount of time. There are several loan forgiveness programs, but their requirements can be stringent.
Private student loan lenders typically aren't as flexible, but they may still offer some of the options above. Reach out to your lender to discuss your situation before you have to make a late payment. An open line of communication may not solve all your problems, but it will ensure you don't miss out on opportunities to avoid late fees and payments.
