When the Biden administration announced earlier this month that the pause on federal student loan payments will be extended through August, it presented an additional change that could boost the credit scores of millions of borrowers: pulling them out of default.
The Department of Education said borrowers who were in default before the coronavirus pandemic will receive a “fresh start” when payments resume, with the black mark removed from their credit reports. An estimated 7.5 million borrowers could have their statuses wiped clean.
The terms of default vary depending on the type of loan borrowers have, but for most federal loans it means that a payment has not been made in at least 270 days. Expunging the status could boost a borrower’s credit score by as much as 100 points, says Ted Rossman, senior industry analyst at Bankrate. Exactly how much a borrower’s score will rise depends on their individual financial circumstances.
“It could be really significant, especially for someone whose only blemish is a missing student loan payment,” says Rossman. He adds that the potential credit score boost won’t be as dramatic for those with other negative marks in their credit history, like a default on a credit card or auto loan payment.
So far, the Department of Education hasn’t released many details on the change, but seemingly it will apply when federal payments restarts, currently scheduled for September 1.
Last year, a group of Democratic lawmakers led by Massachusetts Sen. Elizabeth Warren and Georgia Sen. Raphael Warnock wrote President Joe Biden a letter urging him to change the default status of federal borrowers. They noted that typically, borrowers can exit default if they make nine on-time payments in a 10-month time period. The CARES Act provided that the federal student loan payment freeze, which has lasted longer than nine months, could count toward that rehabilitation.
The senators urged the Biden administration to make the removal automatic (typically, it requires an application process). It’s not clear from the Department of Education’s announcement that this will be the case, though it is likely, says Rossman.
Being in default can have serious, negative repercussions throughout a borrower’s financial life. A low credit score can impact a consumer’s ability to qualify for loans and credit cards, and may even make it harder to rent an apartment or get hired for certain jobs. Additionally, they could face wage garnishment and other collections fees for not paying their federal loans.
