Student borrowers could see credit scores drop for late loan payments
Nearly 9.7 million student loan borrowers will see drops in credit scores, according to the Federal Reserve.
Straight Arrow News
- Student loan collections will resume May 5th after a five-year pause.
- Millions of borrowers risk wage garnishment, impacting social security and tax returns.
- Defaulting impacts credit scores, affecting loan applications, renting, and even utility services.
- Borrowers can consolidate loans or pursue rehabilitation to resolve default status.
Collections on student loans in default will restart in two weeks after borrowers saw more than a five-year pause.
More than 5 million borrowers could see their wages, social security income or tax returns garnished after the U.S. Department of Education begins the collections process on May 5. The announcement from federal officials comes after months of uncertainty regarding student loan changes, as President Donald Trump looks to weaken previous forgiveness plans.
“American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies,” U.S. Secretary of Education Linda McMahon said in a statement. “The Biden Administration misled borrowers: the executive branch does not have the constitutional authority to wipe debt away, nor do the loan balances simply disappear.”
The percentage of delinquent borrowers fell sharply across the country in the aftermath of the COVID-19 pandemic due to policy changes that allowed people grace in repaying their debt. Before the pandemic, Arizona had a delinquency rate around 17% — falling in the middle of most states. Delinquency refers to a borrower who has missed at least one payment.
Today, it’s estimated that nearly a quarter of borrowers are close to or already in default status across the country.
Around 38% of borrowers are fully up-to-date on their repayments. Most of the remaining people are behind or are in interest-free forbearance or deferment in the midst of developing policy changes.
What happens if you default on your student loans?
Student loans fall into default if they are left unpaid for a long period of time. Loans fall into default status at different times depending on which kind of loan they are, often around 270 days.
Payments can no longer fall under forbearance or deferment after reaching default status.
Does being in default affect your credit score?
Student loan borrowers who have past due student loan payments or loans in default will see a negative impact to their credit score. According to the Office of Federal Student Aid, student loan payments left unpaid for 90 days or more are reported to national credit bureaus.
Having a lower credit score can impact your ability to take out other loans, rent an apartment or be approved for a mortgage. It can also impact your ability to sign up for a phone plan or certain utilities.
What should I do if my student loans are in default?
Once a loan falls into default, the entire balance of the loan becomes due immediately. A borrower can avoid a negative credit report impact and wage garnishment if they pay off the loan in full within 65 days.
Borrowers with loans in default will receive an email from the Office of Federal Student Aid over the next two weeks notifying them of their impending default status. Those borrowers are encouraged to contact the Default Resolution Group.
The most common ways to get out of default include loan consolidation and a process called loan rehabilitation. To rehabilitate a loan, the borrower needs to contact their loan servicer.
Borrowers facing default have the right to receive notice of impending wage garnishment and request a hearing where they can object. Borrowers can choose to object if they believe garnishing 15% of their discretionary income will create an “extreme financial hardship” or if there’s a discrepancy over how much they owe.
Helen Rummel covers higher education for The Arizona Republic. Reach her at hrummel@azcentral.com. Follow her on X, formerly Twitter:@helenrummel.
