Student Loan Payment Changes and How Repaying Them Impacts Your Credit
Sweeping changes to federal student loans took effect earlier this month. Those changes don’t just impact the way you borrow money. They also impact the way you pay it back.
If you are in the repayment phase of your federal student loans, we’ve got some important information on repayment options and how to keep those payments from impacting your credit score. Student loans can either help or hurt your credit, depending on how you handle them.
Here’s what you need to know.
Two Ways to Repay
In an attempt to streamline and simplify repayment options for federal student loans, new ones have been created. Eventually, these two new options will replace what the government is calling “legacy plans” - plans previously in place for borrowers already paying on their student loans before the changes took effect. These borrowers may continue paying according to their original loan terms. Everyone else will choose between a tiered standard plan or a repayment assistance plan.
Tiered Standard Plan
This plan works like most loans. Your monthly payment is based on how much you borrow, your interest rate and how long it takes to pay back. Your payments are determined by dividing your entire balance by the number of months you have to repay it. The timeline for repaying the loan depends on the size of your loan.
Repayment Assistance Plan
This plan is based on what you can afford instead of what you owe. You pay what you can afford for a set period of time, and if there’s a remaining balance, it’s forgiven, meaning, you won’t owe anymore. Your monthly payment ranges from 1% to 10% of your Adjusted Gross Income (AGI) with a minimum payment of $10. The specific percentage depends on how high that AGI is.
How does all of this impact your credit?
The Good News
Credit Mix: Having a student loan adds variety to your credit profile. Lenders like to see that you can handle different types of debt.
No Credit Checks (Usually): Most federal student loans don't require a credit check to get them, so your score won't drop when you apply. ("PLUS" loans require one).
The Ultimate Boost: Making your payments on time is the single best way to build a great credit score. It shows lenders you are reliable.
The Caution Flags
Missed Payments: If you are more than 90 days late on a payment, it gets reported to credit bureaus, and your score will take a hit.
Defaulting: If you completely stop paying, it can ruin your credit and stay on your credit report for seven years. You could even face extra fees or having money taken from your paycheck.
Pro Tips to Protect Your Score
Set up autopay: This ensures you never miss a due date (and it might even lower your interest rate).
Pay extra if you can: Paying even a little more than the minimum saves you money in the long run.
Ask for help early: If you can't afford your payment, call your loan provider right away. Ask about income-driven plans that lower your monthly bill based on what you earn.
You will need to check with your student loan lender for more specific details about the changes to federal student loans and repayment plans. Just remember to treat your student loans with care, and they can be a great stepping stone to building a strong financial future!
If the new cap on federal student lending leaves you with gaps between your federal aid and your tuition costs, you may be in need of a private student loan. LVECU’s partnership with Sallie Mae® could be the opportunity you’re looking for to meet that deficit.