Part of a forbearance or deferment program? Here's what to look for on your credit report
Millions of Americans continue to struggle with their student loan payments as COVID-19 retains its grip on the populace and the U.S. economy.
The U.S. government has stepped in to help, with repayment suspensions on current public student loans and talk of eliminating some portion of student loan debts going forward by the Biden administration. Main Street Americans want to help student loan consumers, too. A recent survey from the Pew Charitable Trusts showed that 81% of Americans believe that the federal government "should make it easier for borrowers to repay student loans."
Some help is already on the table.
"During the COVID pandemic, the federal government suspended all interest and payments for federal student loan borrowers through the CARES Act," noted Travis Hornsby, CFA and founder of Student Loan Planner. Student loan payments and interest deferment on federal student loans have also been extended through September 30, 2021.
Loan forbearance, deferment, and credit score impact
As the smoke clears and student loan borrowers wait on help from Uncle Sam, consumers worried about repaying their college loan debt have two options that can mitigate loan payments in the meantime – student loan forbearance and deferment.
Each program tables federal student loan repayments for a specific period of time, which is likely a relief for struggling borrowers. That said, one area that often goes overlooked with student loan forbearance and deferment programs is credit health. Specifically, borrowers need to keep an eye on any negative impact on their credit scores while in student loan deferment or forbearance.
If your public student loan is in either of these, there are several key realities borrowers should know about in terms of payment terms, and their effect on credit health. Not sure where you fit on the credit score spectrum? Then you should start using a credit monitoring service to track changes to your credit score. Credible can get you set up with a free service today.
On student loan repayment terms...
"Under normal, non-CARES Act times, however, typically when deferring a loan, the handling of payments can be different depending on whether the loan is subsidized or unsubsidized," said Maggie Johndrow, a financial advisor with Johndrow Wealth Management LLC. "If it’s subsidized, you typically wouldn’t have to pay interest during deferment. However, unsubsidized loans require payments to be made on the interest accruing throughout the deferment period. Similarly, forbearance on a loan requires continued payments towards the interest on the loan regardless of whether the loan is subsidized or unsubsidized."
On credit health...
In general, loan deferment or forbearance should not impact your credit, though they will be noted on your credit report.
"While the lender may report your forbearance, as long as any contingencies of the agreement are abided by, any missed payments should not be recorded and your score should not falter," Johndrow said. "Generally, one should wait until they have received written notice of their forbearance agreement before halting payments in order to ensure there will be no effect on their credit."
If you're concerned about credit score impacts when paying off student loans or other outstanding debt, you can use a tool like Credible to check your credit and monitor for identity theft.
Under the CARES Act, policymakers reassured consumers that there should be no negative impact on their credit history as a result of their choice to participate in the deferment of student loans. "Of course if you miss a payment or are late with a payment prior to the approval of your forbearance or your deferral, this will likely negatively impact your credit score," Johndrow added. When you do check your credit report while in forbearance or deferment, pay close attention to the exact terms and language laid out in the report.
"The account status you see on your credit report should indicate whether the line of credit is open or closed as well as any relevant behavior on the account," Johndrow noted. "Generally, new lenders will use this section and the respective information it contains to determine a borrower’s creditworthiness, i.e. are you a high, moderate, or low-risk borrower and subsequently, what will your interest rate be."
"You also might see statuses such as 'Pays as Agreed,' 'Paid/Closed Never Late,' or '120 Days Past Due' on your report – each can impact a credit score," Johndrow added.
When push comes to shove and you need help on your credit report, don’t hesitate to get it.
"If your credit has been seriously hampered from what you believe is a result of approved student loan deferment or forbearance, you may choose to seek professional advice regarding the best next steps to take," Johndrow said.
How can you check your credit health? Start at Credible, where you can not only check your credit but review your credit report for identity fraud.