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.”
- 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.
As a seasoned financial advisor specializing in student loan management and credit repair, I've spent years delving into the intricate details of student loan forgiveness programs and their impact on credit scores. My expertise extends from understanding the nuances of programs like Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness to the intricacies of credit reporting and dispute resolution.
Let's break down the concepts outlined in the article:
Public Service Loan Forgiveness (PSLF): This program offers debt forgiveness for borrowers working full-time for qualifying employers after making 120 qualifying monthly payments.
Teacher Loan Forgiveness: Designed for educators in low-income schools, providing up to $17,500 in loan forgiveness after five years of consecutive service.
Income-Driven Repayment (IDR) Forgiveness: IDR plans offer reduced payments based on discretionary income, with remaining balances forgiven after a certain period (10, 20, or 25 years) depending on the plan.
Saving on a Valuable Education (SAVE) Plan: Introduced as an income-driven repayment plan replacing the REPAYE plan, offering forgiveness after 10, 20, or 25 years of payments based on income and family size.
Fresh Start Program: Initiated under President Biden, this program aims to remove defaulted federal student loans from credit reports, replacing them with "in repayment" status.
Credit Score Impact: Loan forgiveness may temporarily impact credit scores, particularly regarding credit mix, age of credit, and amounts owed.
Credit Report Disputes: Borrowers can dispute inaccuracies on their credit reports, including errors related to student loans, through major credit bureaus or by contacting their loan servicers directly.
Statute of Limitations: Unlike most debts, federal education loans are not subject to a statute of limitations, allowing servicers to pursue delinquent borrowers indefinitely.
Loan Forgiveness Timeline: Qualifying for loan forgiveness requires meeting program criteria and service requirements, which can take several years.
Accessing Loan Information: Borrowers can access their student loan information through the Federal Student Aid website, by contacting 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 my comprehensive knowledge of these topics, I can provide tailored guidance to individuals seeking to optimize their financial standing amidst student loan obligations.