How will student loan forgiveness affect my credit? – Forbes Advisor

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President Joe Biden’s long-awaited announcement on the cancellation and deferral of student loans will have a positive financial impact on millions of borrowers. But the credit implications can be harder to understand.

About 60% of American adults have had a student loan paused due to the CARES Act and other relief policies. Whether or not you qualify for loan forgiveness, having the loan suspended has likely improved your credit history and you may see even more benefits in the future.

What is the impact of the suspension of the student loan on my credit?

Student loans will remain on pause until December 31, 2022. Whether you’re current on your repayments before the pause, have a loan in default, or haven’t started your repayment yet, this can be good news. for your credit.

If your loan was in good standing

Under normal conditions, federal student loans impact your credit in the same way as other loans. Your credit scores improve as you make monthly payments and clear your balances. But missing a single payment can have a negative impact that lasts for years.

“For borrowers to protect their credit scores, the most important thing a borrower can do is keep their payments up to date and avoid bad debts and defaults,” says Jessica Thompson, vice president of the Institute for College Access & Success (TICAS).

Fortunately, suspended federal loan payments are reported as “on-time” payments to the credit bureaus. This means that deferment should not negatively impact your scores.

However, it’s worth checking your credit reports to make sure your service is reporting your payments correctly on time during the break. To check your three credit reports once a week for free until the end of 2022, you can use the federal authorization AnnualCreditReport.com.

If your loan was in default

According to the Department of Education, nearly 7.5 million borrowers defaulted on their federal student loans in May 2022. The Department of Education has taken no action to collect on these outstanding debts since the beginning deferment, and borrowers may even have the opportunity to clean up their credit.

through the department New start initiative, borrowers can rehabilitate their loans and change their credit history to show loans as “in progress” rather than “in collection”. Fresh Start will continue for a year after the federal payments pause ends.

The impact of removing a collection account from your credit report will be different for each borrower, but if you have multiple loans in collection or have loans that have been collected more recently, rehabilitation could significantly increase your credit ratings.

How would student loan forgiveness affect my credit?

So far, it’s unclear how much impact Biden’s student loan forgiveness will have on consumer credit scores, but it should give many borrowers a boost.

One way loan forgiveness can help is to reduce the overall debt shown on your credit reports.

Debt balance is the second most important factor in calculating your credit score, accounting for almost a third of your total FICO score. As your loan and credit card balances decrease, your scores generally improve (all other things being equal).

On the other hand, if the total remaining balance of your student loan is canceled, the account may be closed. While account closure can lower your credit scores, it’s often small compared to the points you earn by reducing your debt balance.

Who is eligible for student loan forgiveness?

Biden’s August 24 announcement will impact as many as 43 million borrowers. Here’s what we know so far:

  • For borrowers earning less than $125,000: Those who went to college on Pell Grants are eligible for up to $20,000 in loan forgiveness, and others up to $10,000.
  • For undergraduate loans: payments will be capped at 5% of your monthly income.

Prior to the announcement, the Biden administration had already canceled up to $32 billion for people with special conditions, including borrowers defrauded by some academic institutions. He also offered interest rate relief.

Visit StudentAid.gov to find out if you qualify for federal student loan forgiveness.

3 Tips for Federal Student Loan Borrowers

Federal student loan suspension is automatic, so suspended borrowers do not need to take any action to extend their loan suspension. In the meantime, here are some expert tips on how you can keep your loan and credit in good standing:

1. Pay attention to loan announcements

“Borrowers will want to pay close attention to news and communications from their service agents on any actions they may need to take,” Thompson says.

Frederick Good, senior vice president of student loans at Citizens Bank, says staying on top of these announcements can help keep your finances and credit in order.

“If/when the payment pause ends, borrowers will be given at least 30 days’ notice before payments resume,” he says, “and will therefore have some time to figure out how that monthly payment amount s ‘incorporates into their overall budget’.

You can also check for announcements and updates from the Department of Educationwho indicated that more information on loan forgiveness is forthcoming, including details on how you can apply for the relief.

2. Know your loan status

“It’s important for borrowers to familiarize themselves with their current student loan status before repayment begins,” Good says. It says you should know “how many loans, under what terms, at what rates, and the total monthly payment that will resume.”

Thompson adds that borrowers should confirm who their service agent is and update their contact information by logging into their StudentAid.gov account. (Note: At the time of publication, StudentAid.gov was down due to increased traffic.)

3. Work with your repairer

“I encourage borrowers to gather information about their loan manager and get acquainted with repayment plans availablesays Karen McCarthy, vice president of public policy and federal relations at the National Association of Student Financial Aid Administrators (NASFAA).

Even if you qualify for a rebate, you may still have outstanding debt. If so, Thompson advises contacting your service agent to see if you’re in the best reimbursement plan available and, if necessary, taking steps to reapply.

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