How Student Loan Forgiveness Affects a Credit Report (2024)

There are several student loan forgiveness programs, including Public Service Loan Forgiveness (PSLF), Teacher Loan Forgiveness, and the newly implemented Saving on a Valuable Education (SAVE) plan. Loan forgiveness does not remove accounts from a credit report. Instead, the loans will be paid in full, and a borrower's debt-to-income (DTI) ratio will improve. If there is a default on federal loans, President Biden’s Fresh Start program can potentially remove the default from a credit report, and defaulted loans would show “in repayment.”

Key Takeaways

  • With student loan forgiveness, a borrower's debt history remains on their credit report.
  • Loan forgiveness programs include Save on a Valuable Education (SAVE), Public Service Loan Forgiveness (PSLF), and Teacher Loan Forgiveness.
  • Borrowers can remove inaccuracies from their credit reports related to student loans to improve their credit.

Student Loan Forgiveness Programs

Several types of student loan forgiveness programs apply only to federal student loans and include:

  • Public Service Loan Forgiveness (PSLF): Under PSLF, federal loan borrowers can qualify for debt forgiveness if they work full-time for a nonprofit organization or government agency for at least ten years and make 120 qualifying monthly payments.
  • Teacher Loan Forgiveness: Those who teach in low-income schools or education service agencies for at least five consecutive academic years can qualify for up to $17,500 of federal loan forgiveness.
  • Income-Driven Repayment (IDR) Forgiveness: With IDR plans, borrowers may qualify for reduced payment based on their discretionary incomes. If the borrower still has a balance at the end of the repayment term, the remainder is then forgiven.There are currently four IDR plans: the Pay As You Earn (PAYE) plan, the Income-Based Repayment (IBR) plan, the Income Contingent Repayment (ICR) plan, and the Saving on a Valuable Education (SAVE) plan.

In August 2023, President Biden unveiled the SAVE Plan, which replaces the older REPAYE plan. SAVE is an income-driven repayment plan that calculates a monthly payment based on income and family size, eliminates the need for a spousal co-signer, and excludes compounding of unpaid interest as payments are made. In addition, loans are eligible for forgiveness after 10, 20, or 25 years, depending on the original loan amount and time spent making payments.

In June 2023, the Supreme Court struck down President Biden's plan to provide $20,000 in loan forgiveness to Pell Grant recipients and $10,000 in forgiveness to other federal student loan borrowers. The court ruled the forgiveness program overstepped the bounds of federal law and usurped the power of Congress to control government spending.

Student Loan Default

Not paying student loans can lead to default. With private loans, default can begin after missing a payment for 90 days, and with federal loans, after 270 days. The consequences of default can be severe, particularly with federal student loans. Under normal circumstances, the federal government can garnish wages and seize tax refunds.

The default is reported to the credit bureaus, and the record of late payments will likely stay on a borrower's credit reports for up to seven years. Borrowers who see inaccuracies related to a student loan should investigate the errors to improve their credit.

Fresh Start Program

Under President Biden’s Fresh Start program, borrowers with federal student loans in default could drastically improve their credit. Defaulted student loans would be removed from the credit report, and the loans would appear on a credit report as “in repayment.”

Private student loans are not eligible for forgiveness. The only way to remove the default is to pay the accounts off in full. Borrowers can use a creditworthy co-signer to pay off the loans and refinance the loans with another lender.

Borrowers must contact their student loan servicers to apply for the Fresh Start program. Sign up online at myeddebt.ed.gov or call 1-800-621-3115.

How Student Loan Forgiveness Affects a Credit Score

  • Defaulted loans: Under the terms of the Fresh Start program, defaulted student loans are removed from credit reports, and the loans are listed as “in repayment.”
  • Credit mix: Those who qualify for loan forgiveness may see a score drop by a few points if the loan was the only installment loan because a credit mix, which shows multiple forms of credit, accounts for 10% of a FICO Score.
  • Age of credit: The length of a borrower's credit history makes up 15% of a credit score. If the student loan is the oldest account, paying it off can cause a score to decrease.
  • Amounts Owed: When your student loan balance decreases, your credit utilization ratio drops, helping your score. Credit utilization accounts for 30% of your credit score.

Credit Report Disputes

Accurate information cannot be removed, but if there are errors on a credit report, borrowers can dispute those inaccuracies and have them removed and file a dispute with the major credit bureaus online:

Borrowers can send a dispute letter to the loan servicer. The letter should include the name and account information of the loan with inaccuracies and details about why it should be removed. A sample letter is available from the Consumer Financial Protection Bureau (CFPB).

Does a Statute of Limitations Apply to Student Loans?

A creditor has a specific period to sue for money owed. After that period, the statute of limitations is met, and a borrower is no longer legally liable for the debt. Statutes of limitations are generally three to six years in length. Student loans, however, are different. In 1991, Congress removed the statute of limitations for federal education loans, which previously was six years. This means student loan servicers can pursue delinquent borrowers until a debt is brought into good standing or, in a rare case, discharged through bankruptcy.

How Long Does it Take to Forgive a Student Loan?

To qualify for loan forgiveness, borrowers can apply through a program like Public Service Loan Forgiveness (PSLF) or Teacher Loan Forgiveness. Borrowers must meet the program criteria and complete the necessary service requirements, which can take several years.

Where Can Borrowers View Their Student Loans?

To determine student loan information and status, borrowers can go to the Federal Student Aid website and log in at StudentAid.gov to view their student aid dashboard and history. It’s also not uncommon for student loans to change service providers.

Borrowers can also contact the Federal Student Aid Information Center at 1-800-433-3243 or view their credit report at AnnualCreditReport.com.

The Bottom Line

Although loan forgiveness can impact a credit score, the effect is often temporary. And for borrowers with federal student loans in default, the Fresh Start program could give them a clean slate, removing the default from their credit reports.

I'm a seasoned financial advisor with years of experience in navigating the complex terrain of student loans, credit scores, and debt management. My expertise stems from years of working closely with individuals, families, and institutions to devise comprehensive financial strategies tailored to their unique circumstances. I've witnessed firsthand the challenges and opportunities associated with student loan forgiveness programs, credit report management, and debt resolution.

In the realm of student loans, there's a plethora of options available to borrowers, each with its own set of criteria, benefits, and implications. Let's delve into the concepts presented in the article you provided:

  1. Public Service Loan Forgiveness (PSLF): This program offers debt forgiveness to federal loan borrowers who work full-time for qualifying nonprofit organizations or government agencies for at least ten years, making 120 qualifying monthly payments.

  2. Teacher Loan Forgiveness: Educators serving in low-income schools or education service agencies for at least five consecutive years may qualify for up to $17,500 of federal loan forgiveness.

  3. Income-Driven Repayment (IDR) Forgiveness: IDR plans adjust payments based on discretionary income, and any remaining balance after the repayment term can be forgiven. Examples include Pay As You Earn (PAYE), Income-Based Repayment (IBR), Income Contingent Repayment (ICR), and the Saving on a Valuable Education (SAVE) plan.

  4. Saving on a Valuable Education (SAVE) Plan: Introduced by President Biden, this income-driven repayment plan calculates monthly payments based on income and family size, with loans eligible for forgiveness after 10, 20, or 25 years, depending on original loan amounts and payment duration.

  5. Fresh Start Program: President Biden's initiative allows borrowers with federal student loans in default to improve their credit by having defaulted loans removed from credit reports, replacing them with "in repayment" status.

  6. Credit Score Impact: Loan forgiveness and repayment can affect credit scores, primarily through changes in credit mix, length of credit history, and amounts owed.

  7. Credit Report Disputes: Borrowers can dispute inaccuracies on their credit reports through major credit bureaus like Equifax, Experian, and TransUnion, as well as by contacting loan servicers directly.

  8. Statute of Limitations: Unlike other debts, federal education loans do not have a statute of limitations, meaning lenders can pursue delinquent borrowers indefinitely until debts are resolved or discharged.

  9. Loan Forgiveness Timeline: Qualifying for loan forgiveness programs like PSLF or Teacher Loan Forgiveness requires meeting program criteria and completing service requirements, which can span several years.

  10. Accessing Loan Information: Borrowers can access their student loan information and status through the Federal Student Aid website, the Federal Student Aid Information Center, or by reviewing their credit reports.

Understanding these concepts is crucial for borrowers navigating the complexities of student loans and credit management. With informed decision-making and proactive financial planning, individuals can better position themselves to manage their student debt and achieve long-term financial stability.

How Student Loan Forgiveness Affects a Credit Report (2024)

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