Several student loan forgiveness programs exist, including Public Service Loan Forgiveness (PSLF), Teacher Loan Forgiveness, and the newly implemented Saving on a Valuable Education (SAVE) plan. Loan forgiveness doesn't 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 a borrower defaults on a federal loan, President Biden’s Fresh Start program can potentially remove the default from their credit report, and defaulted loans would show “in repayment,” which can also increase your score.
Key Takeaways
- With student loan forgiveness, a borrower's debt history remains on their credit report.
- Loan forgiveness programs include Saving 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 SAVE plan.
In August 2023, President Biden unveiled the SAVE Plan, which replaces the older REPAYE plan. SAVE is an IDR 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.
On July 18, 2024, a federal appeals court blocked the SAVE plan until two court cases centered around the IDR plan could be resolved. The Department of Education has moved borrowers enrolled in the SAVE Plan into an interest-free forbearance while the litigation is ongoing.
It has also outlined options for borrowers who were nearing Public Service Loan Forgiveness (PSLF)—borrowers can either "buy back" months of PSLF credit if they reach 120 months of payments while in forbearance or switch to a different IDR plan.
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 loan debt. Under normal circ*mstances, 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. The deadline to apply is Sept. 30, 2024. Sign up online at myeddebt.ed.gov or call 1-800-621-3115.
How Student Loan Forgiveness Affects a Credit Score
The impact of student loan forgiveness depends greatly on a borrower's unique credit profile. Some may see a slight dip, but forgiveness will have a net positive effect for most.
- Defaulted loans: Under the Fresh Start program, defaulted student loans are removed from credit reports and listed as “in repayment.”
- Credit mix: Those who qualify for loan forgiveness may see their scores drop by a few points if the student loan was their only installment loan, as their credit mix (i.e., the different types of credit accounts they have) accounts for 10% of their FICO Score.
- Age of credit: The length of a borrower's credit history makes up 15% of their credit score. If the student loan is the oldest account, paying it off can lower a score.
- Amounts owed: When your student loan balance decreases, your credit utilization ratio drops, helping your score. Credit utilization accounts for 30% of a credit score.
Credit Report Disputes
Part of good credit hygiene is checking your report regularly to ensure the information is accurate, since errors may drag your score down. For example, look for student loans that you repaid, but that haven't been closed, or if you are using the Fresh Start program, check to make sure your loans are now listed as in repayment. Borrowers cannot remove accurate information, but if there are errors on a credit report, you can dispute those inaccuracies and have them removed. You can file a dispute online with each of the major credit bureaus:
Borrowers can also send a dispute letter to their loan servicer. The letter should include the loan's name and account information with inaccuracies and details about why it should be removed. The Consumer Financial Protection Bureau (CFPB) has a sample letter available to borrowers.
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 the borrower can no longer be pursued for repayment using legal means. 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 was previously six years. This means student loan servicers can pursue delinquent borrowers until a debt is brought into good standing or, in rare cases, 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 PSLF, Teacher Loan Forgiveness, or an income-based plan. 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 should log into their Federal Student Aid account to view their financial aid dashboard and history. 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.
