In the next few weeks, millions of borrowers who've been catching a break from those student loan payments for over three years will have to start repaying them --and many of these borrowers may not feel entirely prepared for this change.
In fact, many are considering defaulting on their student loans with hopes that it won't hurt their credit. Is this true? Read on to learn more about the truth of 2023 student loan repayment and your credit.
Student Debt Relief: Challenges Ahead for Borrowers
This whole student loan break started in 2020 when the pandemic began causing upheaval in the U.S. It was a relief at first, but as the cost of living went up, that relief started to shrink. Recent surveys show that people have been using their money for other things, and when the time comes to pay up again, many expect they won't be able to.
Now, here's the lowdown on how these student loan payments can mess with your credit once the break is over.
Is There a Second Student Loan Grace Period in the Works?
Right after the Supreme Court struck down student loan forgiveness, the Biden administration proposed another plan to soften the blow for those who can't make their payments when they start up again -essentially, another extension of the student loan repayment freeze.
It covers a period from October 1, 2023, to September 30, 2024, during which the Department of Education won't stick borrowers with default or label their loans delinquent if they miss payments. They also promised not to report those missed payments to the credit bureaus or debt collectors during that time.
But here's the deal: Even though the biggest consequences of missing payments might be on pause for a year, both the Education Department and the National Foundation for Credit Counseling) are telling borrowers to pay up if they can.
Because one more year extension is not likely to make a difference in easing the repayment burden.
Remember, missing or late payments on student loans can mess up your credit score, just like any other loan. And if it ends up in collections, wage garnishment is a very real consequence.
On the other hand, you can develop a repayment plan now or start repaying if you can. So whether there is an extension or not, you're in the best position to boost your credit score --not hinder it--with your student loans.
How to Boost Credit with Student Loan Payments
Now, prospective homebuyers might be thinking, "Why bother paying if there are no immediate consequences?" Well, there's a good reason. Starting September 1, student loan interest will start piling up again. If you're not making payments, your loan balance will grow, which could make it harder to get other types of credit, which is already a challenge.
Here's another reason to consider – making on-time payments can help reduce your student loan balance, and that can boost your personal credit score. Remember that credit scores depend on many factors, so it's not a guarantee that your score will skyrocket, but it definitely doesn't hurt.
If You're Thinking of Buying a Home
So, here's the takeaway: If they're thinking about buying a home in the next year or so, it's time to start getting ready for those student loan payments to make a comeback. Don't let them sneak up on you! It's all about staying ahead and keeping your financial future looking bright.