student loan servicers struggles could be impacting your credit scores
More than 40 million American consumers have student loan debt. Many of those borrowers moved their student loan debt to the back of their mind as the payments on those loans (and their accrual of interest) were suspended by the federal government in March of 2020 in response to the Covid-19 pandemic The suspension of those loan payments, however, ended on September 30th. You may have seen or heard stories or media accounts that many borrowers have been struggling to communicate with their loan servicers about their loan accounts. Some social media posts detail waiting on the phone on hold for multiple hours in an effort to talk to loan servicers’ representatives.
The United States Department of Education contracts with a group of loan servicing companies to manage and collect the payments for federal student loans. These loan servicing companies are private companies, they are not owned or controlled by the government. The management and collection tasks they perform are “outsourced” by the Department of Education. The companies that the government outsources this work to include Edfinancial, MOHELA, Aidvantage and Nelnet. If you have student loan debt, you likely have seen the name of one of these companies on your credit report.
One of these loan servicers, Nelnet, seems to be the target of many of borrowers’ online complaints. Those complaints were recently detailed in an article which was published by the Daily Beast, an online news and opinion site. https://bit.ly/41lYWLb
Nelnet is not the only one of the servicers that has struggled to perform the tasks that the government hired them to perform. Another loan servicing company, MOHELA,has incurred the Department of Education's wrath. As a result of MOHELA’s failure to give borrowers proper notice of their due date for their resumed loan payments, it is having a payment that is due to it withheld by the Department of Education. According to an article in Money Magazine, MOHELA’s lack of proper notice resulted in 800,000 borrowers being delinquent with their payments. https://bit.ly/3tinhVI
Borrowers filed a lawsuit in Missouri this week against MOHELA claiming that the company failed to process applications for loan forgiveness in a timely or proper fashion and are asking to be awarded five million dollars in damages. https://bit.ly/3tivMQu
HOW STUDENT LOANS IMPACT CREDIT SCORES
Student loans, both federally financed and privately financed loans, report on your credit reports. During the pandemic payment pause most borrowers' credit scores benefited from the pause in payments (also known as “forbearance”), as those loans were reported as being paid in a timely fashion, even if no payments had been made during the forbearance period.
Similarly, if a borrower was eligible for Public Service Loan forgiveness during this period of forbearance, they also benefited. Their “zero dollar” forbearance payments were counted towards the 120 months of payments that are required for that loan forgiveness program.
The timeliness of your student loan payments can have a big impact on your credit scores. The 800,000 people who made their payments late because they didn’t receive proper notice of their payment dates from MOHELA? There is a good probability that the loan servicer is reporting those late payments on their credit reports. Even a single 30 day late payment can have a significant derogatory impact on your credit scores.
Student loans are reported on your credit as installment accounts. Installment accounts are accounts which require that you make a payment for a certain number of months. The term on federal student loans is typically 120 months (10 years.)
PAYING YOUR LOANS ON TIME IS IMPORTANT
Paying student loans on a timely basis can help your credit scores grow the same way that paying other installment loans-like a mortgage or auto loan would. Positively reported student loan payments can help you with three parts of the credit scoring algorithm: credit history, credit mix, and payment history.
If you are among those struggling to understand your student loans post- pandemic payment obligations, you may not want to be cautious about relying on your student loan servicing company for help. As previously mentioned, people are reporting that they are waiting for hours to get through to a representative from their loan servicer by phone. You should also be aware that your loan servicer does not have a fiduciary relationship with you. In other words, they do not have an obligation to put your interests first when they give you advice.
Pre-pandemic, there were claims that student loan servicers instructed their call center employees to encourage borrowers who called those servicers for help to direct those borrowers into forbearance programs that were not always in the borrowers’ best interest. It was claimed that the servicers knew that putting a borrower into forbearance took much less time (and employee wages) than spending the time to investigate the best option for the borrower, so the servicer “coached” its call center employees to steer borrowers into forbearance.
HOW TO PROTECT YOUR CREDIT SCORES
What can you do to protect your credit scores and history? The first thing that you should do is simple-check your credit reports, at the very least on a monthly basis.
You can also check the current status of your loans on the Department of Education’s website. Simply go to studentaid.gov. Alternatively, you can call 1-800-433-3243. (These sources are for federal student loans, only. If you have private student loans, you will have to contact the lender that you obtained the loan from. Information about private student loans, including contact information for your lender, will also likely appear on your credit reports.)
If you “think” that you have federal student loans that are not appearing on your credit reports or on the Department of Education website, those loans may have been parent PLUS federal loans. Even though these loans paid for your education, they were taken under your parent’s name. These loans will show up on your parent’s credit report. (Your parent is ultimately responsible for the repayment of these types of loans, not you. Don’t tell them that we are the ones that told you.)
Many student loan borrowers are going to have to make lifestyle adjustments in order to afford that “new” monthly payment that hasn’t been there for a couple of years. If you find yourself struggling with your payments, look into income based repayment programs, to see if they can help your situation.
Be aware that there are repayment options available to you that may help to reduce the amount of your loan payments. You will need to spend some time to determine which of these repayment options might work best for you. You may also want to take a careful look at the repayment information that is being provided to you by your loan servicer.
Take a fresh look at the Biden administration’s new income based repayment program called “Saving on a Valuable Education”, or SAVE. The SAVE repayment plan sets your monthly payment based upon the size of your family and your adjusted income level. This new plan's calculation of your adjusted income level is much more generous than the calculations used in previous government income based repayment plans. The plan promises borrowers that their monthly payments should be reduced to about ten percent of their discretionary monthly income. If this plan looks like a good option for you, you will have to go to the Department of Education’s website to enroll.
Student loan debt, if properly managed, can boost your credit scores significantly. On the other hand, if your loan payments are not paid in a timely fashion; they can significantly damage your scores. Remember financial credit scores are “forward looking.” If you have made mistakes in the past, there are government programs, like loan rehabilitation, that can help put your scores on the road to recovery.
The Department of Education has acknowledged that widespread errors have been made by the loan servicers since loan repayment has restarted this fall. In some instances, they have ordered servicers to reimburse borrowers for costs that have been incurred (like overdraft fees) as a result of those errors. Here is a link to a memorandum from the Education Department authorizing remediation for the servicers’ errors: https://www2.ed.gov/policy/gen/leg/foia/decision-memorandum-return-to-repayment-servicing-errors-10-29-23-signed-redacted.pdf
You may be entitled to this type of relief, but you will have to apply for it.
If your loans are privately held, most of what we have discussed here won’t apply to your situation. Some private lenders have their own assistance programs, contact yours and see if they have any help to offer you. Keep in mind that, like federal student loan servicing companies, your lender doesn’t necessarily have an obligation to offer you assistance that is “in your best interest.” So, do your own homework about any options that they might offer you. Forbearance programs might be available to you, and not having to make any payment at all may seem tempting, but in the long run they will seriously increase the total amount that you ultimately pay to satisfy your loan obligation.