Written By Adam S. Minsky, JD
The Biden administration is moving forward with a wide array of student debt relief initiatives. This month alone, the Education Department announced billions of dollars in new student loan forgiveness, started a process to create a new student debt relief plan in the wake of last month’s Supreme Court ruling, and started implementing temporary initiatives designed to ease borrowers’ transition back to normal billing, as student loan payments are scheduled to resume in a matter of weeks.
Many of these initiatives are expected to boost consumer credit scores, or at least prevent them from dropping. And according to a key federal financial oversight agency, borrowers are starting to see the effects.
Fresh Start program boosting student loan borrowers' credit
The Consumer Financial Protection Bureau (CFPB) released a report last week indicating that the Fresh Start program is already positively impacting borrowers’ consumer credit reports. Fresh Start is a temporary initiative that provides defaulted federal student loan borrowers with a pathway back to good standing. Borrowers will have one year after the student loan pause ends to take advantage of the program. Over seven million borrowers are expected to potentially benefit.
But many defaulted federal student loan borrowers are already seeing the benefits. Under Fresh Start, the Education Department has been updating consumer credit reporting to reflect that the loans are in good standing.
“Fresh Start [coincides] with an immediate increase in credit scores for affected borrowers,” said the CFPB in its report. “Prior to December 2022, borrowers ultimately affected by Fresh Start had lower scores,” than other borrowers. “By December 2022, however, credit scores for Fresh Start borrowers increased dramatically and aligned more with the scores of borrowers whose loans were not affected by Fresh Start.” The CFPB estimated that Fresh Start borrowers experienced median credit score increases of around 54 points from September 2022 to December 2022.
The positive credit score changes could make a significant difference for these borrowers as they seek out new employment, housing, and credit opportunities.
Student loan forgiveness initiatives may boost borrowers' credit
In addition to Fresh Start, the Biden administration is also implementing a number of student loan forgiveness initiatives, even as officials grapple with last month’s Supreme Court ruling that struck down Biden’s signature student debt relief plan.
The Education Department announced earlier this month that over 800,000 borrowers qualify for student loan forgiveness in the first wave of approvals under the IDR Account Adjustment. This initiative provides retroactive credit toward IDR loan forgiveness for borrowers, and those who receive enough credit to cross the 20-year or 25-year threshold will become eligible for discharge. More borrowers are expected to qualify in the coming months.
Officials also announced this week that the department has approved $130 million in student loan forgiveness for borrowers in Colorado who were defrauded by their school. This is just the latest in a series of initiatives through the Borrower Defense to Repayment and Closed School Discharge programs to provide relief to borrowers who were subject to misrepresentations or broken promises by their educational institutions. The department estimates that it has approved nearly $15 billion in loan forgiveness for defrauded borrowers so far, with more on the way.
Although the CFPB has not fully analyzed the credit score impacts of these initiatives, many borrowers who receive student loan forgiveness may see a boost to their credit score as a result of the significant change to their debt-to-income ratios. Even borrowers who see no significant change to their credit scores may still find it easier to be approved for new credit or housing due to their reduced debt burden.
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Borrowers shielded from negative credit consequences as student loan payments resume
In the wake of last month’s Supreme Court decision, and the codification of the end of the student loan pause as part of last month’s debt ceiling negotiations, millions of borrowers are facing a return to repayment later this summer. The student loan pause officially ends at the end of August. Interest will start accruing in September, and student loan payments will be resuming shortly thereafter, with the first billing due dates in October.
President Biden indicated that the Education Department will provide a 12-month “on ramp” to borrowers as student loan payments resume. Akin to a lengthy grace period, officials have indicated that borrowers will not be penalized for missing student loan payments during this one-year period.
“To protect the most vulnerable borrowers from the worst consequences of missed payments following the payment restart, the Department is instituting a 12-month ‘on-ramp’ to repayment, running from October 1, 2023 to September 30, 2024, so that financially vulnerable borrowers who miss monthly payments during this period are not considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies,” according to a White House fact sheet.
Thus, between Fresh Start and the “on- ramp” initiative, most federal student loan borrowers should be shielded from any negative credit reporting for at least the next year. And many of these borrowers – particularly borrowers in default, as well as those who become eligible for student loan forgiveness – may ultimately see their credit boosted.
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