Student Loan Payments Are Back—and So Are Credit Consequences: What You Need to Know
The end of President Biden's one-year "on-ramp" for federal student loan borrowers marks a significant shift in the financial landscape for millions of Americans. As of September 30, 2023, the grace period is over, and missed or late payments on student loans will once again be reported to the major credit bureaus—Equifax, Experian, and TransUnion. This change can have far-reaching effects on your credit score, personal finances, and overall lifestyle.
For over three years, during the pandemic-related pause on federal student loan payments, borrowers had one less financial burden to worry about. For the past year, even with payments resuming, a special reprieve allowed missed payments to remain off credit reports, protecting borrowers' credit health. That courtesy, however, is now a thing of the past.
As student loan payments become a reality once more, it's essential to understand how this shift could impact your financial well-being and what steps you can take to navigate this transition effectively.
How the End of the Repayment On-Ramp Affects You
For many borrowers, the end of this “on-ramp” period marks the beginning of a new financial strain. During the past year, even if you missed a payment, it wasn’t reported to credit bureaus. Delinquencies were not reflected on your credit score, and you were not placed in default or sent to collection agencies.
Now, missed payments will have real consequences. If you're unable to meet your loan obligations, this can affect your credit score, which in turn can impact everything from qualifying for a mortgage or car loan to even being approved for a rental lease.
For those enrolled in repayment programs like SAVE (Saving on a Valuable Education), some confusion may arise. Legal challenges in several Republican-led states have caused freezes or delays in loan bills, meaning that for certain borrowers, payments are still paused. However, for the vast majority, the normal rules of loan repayment have resumed.
The Return of Interest Accrual
Federal student loan interest began accruing again in September 2023, which means your balance is not only back but growing. This can be a particularly challenging adjustment after more than three years without worrying about interest adding to the total debt.
Interest accrual is crucial because missed payments or even partial payments can quickly balloon the total amount owed. If you’re in a situation where you can’t make your full payment, you might be accruing interest faster than you’re able to pay down the principal, effectively locking you into a debt spiral.
This is where the importance of understanding your repayment plan comes in. There are options to adjust your monthly payments based on your current financial situation, which could provide a cushion as you ease back into regular payments.
How This Can Impact Your Credit
A key concern for borrowers is the potential hit to their credit scores now that payments—or lack thereof—are being reported again. The three major credit bureaus will track whether you’re keeping up with your student loan payments, and missed payments will be reported after 90 days of nonpayment. This means if you don’t pay your October bill, you have until January to make things right before your delinquency is reported.
Once reported, the damage can be significant. A single missed payment could cause your credit score to drop by as much as 100 points, depending on your credit history. If you have a long history of on-time payments and solid credit, the impact might be less, but for those who are already struggling with their credit, the hit can be severe.
The Broader Impact on Personal Finances
A drop in your credit score can have ripple effects beyond just your student loans. Many Americans rely on their credit scores for access to a wide range of financial products, from credit cards to home mortgages and auto loans. If your score takes a dive due to missed student loan payments, you could face higher interest rates on loans and credit cards, making it more expensive to borrow money in the future.
Additionally, a lower credit score can even impact your ability to rent an apartment or, in some cases, land a job. Employers and landlords often run credit checks as part of their application process, and a delinquency on your student loans can raise red flags.
Personal Lifestyle Considerations
The return of regular student loan payments can also place a strain on your day-to-day lifestyle. For many borrowers, the pause in payments during the pandemic created more disposable income, allowing them to focus on other financial goals such as saving for a home, paying down credit card debt, or simply affording everyday expenses without the added pressure of loan payments.
Now that payments have resumed, many people are finding their budgets stretched thin. The rising cost of living, inflation, and high interest rates on other debts are compounding the financial strain that borrowers are feeling as they adjust to this new reality.
If you’re finding it difficult to make ends meet with the return of student loan payments, it might be time to reassess your budget and financial priorities. Cutting non-essential expenses, exploring additional income streams, and focusing on high-interest debts first can help you manage this transition more smoothly.
What You Can Do to Avoid Credit Damage
Despite the challenges, there are steps you can take to protect your credit and avoid falling behind on your student loan payments:
Enroll in an Income-Driven Repayment Plan
If you’re struggling to afford your current payments, consider enrolling in an income-driven repayment plan. These plans adjust your monthly payments based on your income and family size, which can provide significant relief for borrowers with lower incomes.
Request a Forbearance or Deferment
If you’re facing a temporary financial hardship, you might be eligible for a forbearance or deferment, which allows you to temporarily pause payments without accruing additional penalties. Keep in mind, however, that interest will continue to accrue on most loans during this time.
Set Up Auto-Pay
Many servicers offer a discount on your interest rate if you enroll in auto-pay, which ensures your payments are made on time every month. This not only helps you stay current on your loans but can also provide a slight reduction in your overall interest payments.
Consolidate Your Loans
Loan consolidation can simplify your payments by combining multiple loans into one, often with a lower interest rate. This can make it easier to manage your payments, especially if you’re juggling several different loan balances.
Seek Professional Financial Advice
If you’re feeling overwhelmed by the return of student loan payments, consulting with a financial advisor can help. A professional can provide personalized strategies for managing your debt, improving your credit score, and achieving long-term financial health.
The Role of Employers and Workplace Benefits
An emerging trend in personal finance is employer-sponsored student loan assistance programs. More companies are offering student loan repayment benefits as part of their compensation packages. If you’re employed, it’s worth checking with your HR department to see if your employer provides this type of support.
Employer contributions toward student loans can make a significant dent in your debt load over time, easing the financial burden and helping you stay current on payments. Some companies even offer matching contributions, similar to a 401(k) plan, providing further incentive to explore this option.
Looking Ahead: What’s Next for Borrowers?
While the repayment on-ramp may have ended, the Biden administration has expressed continued interest in supporting student loan borrowers. Discussions about potential reforms to the student loan system and additional forgiveness programs remain ongoing. However, these potential changes could take months or even years to implement, leaving borrowers to manage their payments in the meantime.
It’s important to stay informed about any future policy changes that may impact your loans. Subscribing to updates from the Department of Education or your loan servicer can help you stay on top of important deadlines and new programs that could ease the financial burden of student loan repayment.
Take Control of Your Student Loan Repayment
As student loan payments become part of everyday life again, it’s more important than ever to be proactive in managing your finances. From protecting your credit score to reassessing your budget, taking the right steps now can help you avoid the long-term consequences of missed payments.
By understanding the available repayment options and taking action to stay current on your loans, you can maintain control of your financial future—even as the era of pandemic-related student loan relief comes to a close.