Does a Student Loan Forbearance Affect My Credit Score

Forbearance on your student loans will not cause a negative or positive effect on your credit score. It is only noted so the credit bureaus are aware you have not defaulted.

However, you do need to be aware of how interest, auto-payments, and when the forbearance will all affect your student loans; your future financial health!

I’ve been getting a lot of questions regarding student loans ever since the COVID 19 Relief Package was created. I’m answering all of those questions right here in one spot to make it easier for all of you to get access to it.

Happy Reading!!

What is a Deferment?

A deferment has the same job as Forbearance. It helps to postpone payments you can’t afford to make without defaulting on your student loan. But more specifically, a deferment is initiated by the lending company.

The lender will excuse you from making payments for a limited time if you are unemployed, experiencing economic hardship, returning to school, military deployment, or active in the Peace Corps.

Deferments are usually granted for 36 months.

COVID 19 also qualifies as deferment status. I know everyone keeps saying forbearance but the government is the one initiating the payment postponement on all government-owned loans.

More details about that later.

 

 

Isn’t that the same thing as a Forbearance?

A deferment is the same concept of Forbearance but the rules are different. Let me explain.

Forbearance is a payment reduction or suspension requested by you, the one who is paying back the money. It too can be due to some type of economic hardship or life-altering change that makes it difficult for you to come up with the monthly payments.

The real difference is the circumstance with your finances. Forbearance can be any other type of economic hardship that isn’t specifically outlined under the deferment requirements.

For example, my divorce in 2017 qualified for Forbearance. I changed from a two-income household to one.

Forbearance usually lasts only 12 months but depending on your lender you may be able to reapply for another 12 months. You will not be able to be granted forbearance for more than 36 months during the life of the loan.  

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Explain the COVID 19 Student Loan Relief Package

If you google COVID 19 Student Loan Relief  I’m sure you’ll see a million different articles with different pieces of it explained.

Well, here is a summarized version of the important highlights you need to know.

This is a deferment being offered by the Department of Education for Federal Government Loans only. It is also for the time period from March 20, 2020 to September 30, 2020.

If you have a private loan you’ll need to call your lender to discuss options for COVID 19 relief.

You will not be required to make any student loan payments during this time period. The interest accrual will also be postponed. This means your loan balance will not grow due to interest being added to it month after month.

Debt Collectors hired by the government to collect on past due student loan accounts were told to stop collections on Federal Loans. Individuals who are past due on student loan payments will not receive collection calls or letters.

If you do it might be a scam. You’ll find more detail on that subject below.

For student loan accounts who are 270 days (9 months) past due on the last payment. The IRS has been instructed not to seize your tax refunds to apply toward the past due debt.

You will get to collect your refund. Also, take note, the new Tax Filing Due Date is now July 15^th, 2020.

Will This Affect My Credit Score?

The biggest obstacle that trashes your credit score is by not making payments on your bills on time. This could be anything from utilities, to credit cards, to student loans!

It’s having a consistent history of missed payments that will kill your credit score.

When you have been given a deferment or forbearance on your student loan account make sure you take note of the start date.

Is this date before or after the deferment/forbearance starts?

If your next on-time payment is before the actual deferment/forbearance date then make the payment. Do not risk getting a missed payment on your credit score. It could hurt you if you need to reapply for forbearance.

Since that option expires after 12 months.

Once the start date of the deferment/forbearance kicks in you will not be in default for stopping your payments. This note on your credit score is just there to tell the credit bureaus that you are not in default.

There isn’t a negative or positive effect on your credit from this notation. It’s there to protect you.  

Are Auto-payments still going to be processed

How many of you have set up auto-payments on your student loan accounts to shave off that extra 0.25% a month from your repayments?

Are you wondering what is going to happen to this process during the deferment/forbearance period?

I have two Federal Student Loan carriers Mohela and Nelnet. One of them, Mohela, listed the COVID 19 rules here.

The rules for this lender state the auto-payment process will be postponed until after September 30, 2020.

With that said, for those of you in a situation where you can still work from home and your income hasn’t been impacted. If you want to continue making monthly payments during this time period you will have to set them up manually.

Is the interest still going to Accrue

For the COVID 19 Student Loan Relief Package, the government is also postponing interest calculations during the deferment period. In other words, it is like having an interest free loan until September 30, 2020.

Under normal forbearance circumstances, your student loans would have interest added to the balance every month. As of right now, this process has stopped dead in its tracks.

You can still make payments toward the account but if you are behind on interest payments you’ll only be paying interest.

For those of you who have been keeping up with your interest payments, you’ll be paying the actual borrowed amount on your loan during this time.

Quick story, in 3 yrs and 7 months of Forbearance most of my federal student loans have accrued $6,485.76 worth of interest. I could only afford to pay half of my student loans during that time period due to financial constraints.

My student loan balance increased from $29,017.30 to $35,503.06.

With that being said under the COVID 19 relief, if I choose to make payments during this deferment period on the rest of my student loans my lender will apply for those payments only toward the interest since I haven’t been paying the interest.  

After September 30, 2020 passes all of my student loans that have been in forbearance since September 2016 will be in repayment status.

Even though only the interest will be paid, I plan on making $100 payments each month during this deferment to reduce my monthly student loan payment in the future.

Right now federal student loans are imitating a 0% interest credit card. It’s time for you to take advantage. Regardless of how much you owe, paying whatever you can now will reduce your future monthly payments.

Think of this as an opportunity to get ahead finally!

My goal is to get my payments down from $494 to $350 per month once back in repayment. This confession is proof you are not alone in this struggle.

I cannot recommend enough that if you are still working and your income has not been impacted by COVID 19. Continue to make manual monthly payments.

Even if your loan was in forbearance, like mine, prior to this relief mandate.

When Will Required Payments Start Again

This is something you want to double-check with your lender on just to make sure. If you have Federal Student Loans the payments will be deferred until September 30, 2020.

Am I sounding like a broken record yet!

If you have a private loan and you have to negotiate COVID 19 relief with them the end date will be different. Right now what I’m hearing is the deferment periods are for 60 days (2 months).

That is significantly shorter than the 6 months for federal loans. Stay vigilant so you don’t accidentally miss a payment and damage your credit!

Student Loan Relief Scams to BEWARE of

Now, I have not heard of any scams actually taking place nor am I being asked about them. I just wanted to outline these as a precaution.

Always remember, your Federal Loans are in a deferment requiring no payments or interest accrual until after September 30, 2020.

If your private loans are deferred make sure you have the terms of those conditions written down where you can easily access them.

Below are scams the Consumer Financial Protection Bureau (CFPB) is warning everyone about during this tough time.

Avoid anyone claiming to work for a loan company if they mention the following:

1. 1. Providing payment assistance for an upfront fee.

1. 2. They will give you loan forgiveness immediately. (This is usually a 10 year process)

1. 3. Asking you to sign paperwork allowing them 3^rd party access to contact your student loan servicers directly. (It will be a 3^rd party authorization or power of attorney)

1. 4. Asks you to hand over your Federal Student Aid Pin Number.

Loan servicers and lenders do not need any of this from you to do their job. If you choose to switch loan servicers all they will do is send a full payment for your current loans to the previous provider.

Then they will open an account to start collecting payment from you. Negotiations with your current lenders are not necessary.

Concluding Thoughts

Here are the biggest takeaways I want you to have from this blog post:

• • Forbearance will not affect your credit score as long as your account is current without missed payments

• • Interest will not be charged during the COVID 19 Relief Deferment

• • Auto-payments will not be processed. You can still make payments during this period you just have to do them manually.

• • Know when all of your deferments/forbearances end so you don’t miss a payment.

• • BEWARE of scam companies that might try to reach out to you. All collection calls and mailings have been postponed until September 30, 2020 for Federal Loans.

More Articles You May Be Interested In:

When Credit Cards Hurt Your Finances

The Ultimate Guide To Budgeting

How Do I Get Out of Debt With Bad Credit?

 

 

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