Student Loans and Your Credit Score: What You Need to Know

As student loan payments resume, many Americans face a harsh reality. What was once thought to be a temporary pause is now leading to increased missed payments and, subsequently, damage to credit scores. While the focus often falls on recent graduates, parents and grandparents who cosigned loans also risk significant credit damage. It’s vital to understand how student loans impact credit scores and what steps can be taken to safeguard your financial future.

The Impact of Parent PLUS Loans

Parent PLUS loans, which allow parents to directly finance their child’s education, can wreak havoc on the cosigner’s credit if payments are missed. Currently, there are approximately 3.8 million Parent PLUS borrowers, with outstanding debt soaring over $110 billion. When a student falls behind on payments, the negative consequences extend to the parent’s credit report, causing potential credit score drops of up to 129 points for delinquencies, according to a recent analysis. This can create serious challenges for anyone seeking new loans or refinancing existing debts.

Understanding Delinquencies

Credit scores are vulnerable to payment delinquencies. A payment that is just 30 days overdue can be reported to credit bureaus, while payments that are 60 or 90 days late lead to even steeper drops in your score. The New York Fed has estimated that millions could experience significant credit score declines when reporting resumes. For those with established credit histories, even a small dip can lead to higher interest rates on loans—potentially costing thousands over time.

Stay Proactive with Credit Monitoring

A proactive approach is essential. Regularly monitoring your credit can help you catch any troubling changes before they escalate. Here are some practical steps you can take:

• Sign Up for Credit Monitoring: Use services that alert you to changes in your credit score or new accounts.

• Check Your Credit Reports: Review your credit reports from the three major bureaus at least once a year, ideally more often.

• Act Quickly on Errors: If you spot a missed payment that you believe is incorrect, contact your loan servicer immediately to address the issue.

Payment Options and Strategies

If you or your co-signee are struggling to make payments, know that options are available:

• Consider Consolidation: Parent PLUS loans can be consolidated into a Direct Consolidation Loan, enabling Income-Contingent Repayment (ICR) which adjusts payments based on income. However, be aware this might extend your repayment period and total interest paid.

• Explore Refinancing: For private loans, refinancing might be possible if your credit is still strong. However, keep in mind that refinancing often loses federal protections.

• Seek Temporary Relief: If a payment is missed or will be missed due to budget constraints, contact your servicer to discuss deferment or forbearance options.

Communication is Key

Establishing a clear line of communication with the borrower is crucial. Implementing shared calendars and setting up automated payments can mitigate the risk of missing due dates. If you’re in a position to do so, encourage the borrower to refinance the loan in their own name once they’ve established their credit.

Preparation is Essential

Before any payment slips into delinquency, it’s wise to forge a plan. Talk openly about financial situations and potential changes, and have backup strategies just in case. Whether it’s arranging a one-time partial payment or making a lump-sum payment from savings, being proactive can prevent a small hiccup from becoming a credit disaster.

Conclusion

The resumption of student loan reporting has brought newfound urgency for many borrowers and cosigners alike. By staying vigilant, keeping lines of communication open, and being knowledgeable about payment options, you can protect your credit and avoid unexpected pitfalls. Don’t let student loans dictate your financial future—take charge today!

Priya Desai

Writes about personal finance, side hustles, gadgets, and tech innovation.

Bio: Priya specializes in making complex financial and tech topics easy to digest, with experience in fintech and consumer reviews.