Student Loan Forgiveness

Starting this month consumers with student loans can start applying for the Student Loan Forgiveness Program. This program is for federally held student loans only and does not include private student loans. Individuals who make less than $125,000 and married couples making under $250,000 are eligible for up to $10,000 in forgiveness. If the individual also has a Pell Grant, they are eligible for up to $20,000 in forgiveness. So, how will all this affect a credit report and credit scores?

Several things need to be taken into consideration in how this will affect credit reports and scores. Most consumers with student loans owe a lot more than $10,000 or $20,000. So only part of their loans will be paid off. Depending on what kind of payment plan they are under, having at least some of this debt paid off could lower their payments. For those that are on an income-based payment plan the payments will most likely not change. Since student loans are looked at as installment loans, showing the balances paid down will most likely not help the credit scores. If the forgiveness does in fact completely pay off the debt this could hurt some scores, as once they are paid that payment history goes away. Unless the consumer has other installment loans such as an auto loan or a mortgage, having the student loans paid off could have a negative effect.

It is important to remember that this is a program in which one must apply. It’s not something that will automatically happen. Once applied for, it can take 2-6 weeks to see any results. The last date for applications will be at the end of December 2023.

What about defaulted student loans? Even those with student loans in default can apply for the forgiveness if collection activity was halted on the debt during the COVID payment pause. This could take care of at least some of the past due amount and in some cases might cover it all. Having an amount forgiven though will not remove the derogatory aspect from a credit report. Late payments will remain and if the student loan is in collections, once paid it will show up as a paid collection so the negative impact will still be felt. Even thought the debt, or part of it, has been forgiven does not mean it will fall off the credit report.

That being said, in April 2022 the US Department of Education did announce the “Fresh Start” program. This program will continue for one year after the COVID payment pause ends in January 2023. With the Fresh Start program once your defaulted student loans are brought current, the US Department of Education will start reporting the payments as “in repayment” and will remove the record of default from the credit report. This could be a huge benefit for some people and could result in a significant increase in scores. However, not all loans are available for the Fresh Start program. The US Department of Education has stated they will reach out to those that have defaulted loans that are eligible. You can also go to their website for more information.

Since this is in the beginning stages we have yet to see exactly how much or how little this will affect credit reports. For some, while it will have a monetary benefit, it could have little to no affect on the credit scores. For others it could mean somewhat of a decrease or a possible increase in their scores, depending on what the rest of the credit report contains.