Delinquent student loan borrowers face credit score risks as ‘on-ramp’ ends September 30

Borrowers with federal student loans who have missed making their monthly payments on time, or even skipped making payments, need to know that their credit report could get dinged if they keep doing what they're doing.

For the past year, struggling borrowers have had a breather from bad credit reports. But that break — which has a quirky title known as a "student loan on-ramp" — ends Sept. 30 when student loan servicers will resume reporting missed or incomplete payments to credit agencies.

Some 6.7 million delinquent federal student loan borrowers were shielded from negative credit reports during the on-ramp period in the past year after monthly student loan payments resumed in October 2023, according to a by the U.S. Government Accountability Office in mid-August.

Negative credit reporting was blocked for borrowers who didn't make payments on their federal student loans by placing them into retroactive forbearances once a quarter for up to a year, said Mark Kantrowitz, a student loan expert.

A key point: Interest continued to accrue during the forbearance. As a result, your monthly payments now might be higher as a result of added interest.

What can happen to your credit score as on-ramp period ends

Right now, these borrowers need to ramp it up and get ready to make their monthly payments on their federal student loans starting Oct. 1.

Serious consequences kick back into action for borrowers who miss or delay making their federal student loan payments in October and later. They're looking at getting hit with a delinquency notation on credit reports, and possible decreases to their credit scores.

How much could your credit score go down? The answer will vary by the individual, depending in part on how delinquent you become and how much money is past due on the account or accounts, according to John Ulzheimer, an author and expert on credit reporting and credit scoring.

For some consumers who have strong credit, he said, the impact could be over 100 points depending on the rest of your credit report.

"It can also be zero points, depending on the rest of your credit report," said Ulzheimer, who formerly worked for credit-scoring company FICO and credit bureau Equifax.

"The higher score, the more pronounced the impact," Ulzheimer said. "For someone who already has poor credit, the impact will be much less, or nothing at all."

Ulzheimer, who has strong credit, said he ran a test example on his credit report and saw a loss of around 150 points.

Student loan borrowers get a bit of wiggle room since the federal government reports delinquencies on federal student loans starting at 90 days delinquent. Missing a few days or weeks for one payment won't have an impact and would allow someone time to get back on track.

What is student loan forbearance?See how it differs from student loan deferment and other options for borrowers.

Why some will see their credit card rates go up

Kristen Holt, president and CEO of Farmington Hills-based GreenPath Financial Wellness, said some borrowers might not fully understand the widespread ramifications of how much a delinquency involving federal student loan payments can hurt once the on-ramp program ends.

"It can cause your credit score to go down," Holt said, "and that can cause your credit card interest rate to go up."

A lower credit score gives credit card issuers room to raise your interest rate on your credit card.

The average credit card rates have been setting new records in 2024. The current average rate on a credit card is 20.78%, according to data from Bankrate.com, which began tracking credit card rates in September 1985.

Many credit cards issued by individual retailers are significantly higher than that average. People with weak credit pay far higher than average rates overall, too.

"Someone with a lower credit score can face particularly astronomical credit card rates — over 30% in many cases," said Ted Rossman, senior industry analyst for CreditCards.com and Bankrate.com.

Even if you snagged a limited offer for a 0% rate on a credit card, you could be at risk if your credit score drops. Take a recent 0% offer for the Discover it card that has an introductory period of 15 months for purchases and balance transfers. The online disclosure notes that after the intro rate expires, your annual percentage rate can range from 18.24% to 28.24% based on your creditworthiness. This APR will vary with the market based on the prime rate.

Credit scores haven't been hurt in the past year, Holt noted, if you missed making payments on your federal student loans so some new graduates and others might not understand the broad impact on interest rates for other loans.

Borrowers who owed money on their federal student loans got a break from making payments for more than three years during a lengthy pandemic-related pause. The pause ended and payments had to resume in October 2023.

Why was there an on-ramp program for student loans?

The on-ramp program then kicked in to make sure that no action could be taken that could result in declaring a federal student loan to be in default or otherwise hurt a borrower's credit.

The theory was that struggling borrowers who were long out of practice making student loan payments could face a higher likelihood of defaulting shortly after the pause ended.

But how much did student loan borrowers — who may be busy starting new jobs or raising families or struggling to pay bills — actually pay attention to all the shifts and nuances associated with student loan relief?

Does anyone even know there was an "on ramp" in place for a year?

Do they know their credit score could drive into a ditch now?

Borrowers who missed payments or made partial payments during the past year during the "on-ramp" program timeframe, did not see those loans reported as delinquent to credit bureaus.

Right now, borrowers have started to get statements about their payments, Holt said, but some might not be too concerned because any missed or late payments haven't been hitting their credit scores.

"A lot of people are pretty good about tracking their credit score and they're not seeing that drop," Holt said. "I don't know that people realize that now it's going to hit your credit score until it's already happened."

Right now, you might not get hit with a late fee.

The Higher Education Act authorizes the Education Department to charge late fees for past-due balances exceeding 30 days after the due date. However, the Education Department does not apply late fees for Direct Loans.

Borrowers could face late fees that may apply to Federal Family Education Loan PLUS Loans that are not held by the department.

The Education Department is allowed to require borrowers to pay a late charge of up to 6 cents for each dollar — or 6% — of a required monthly payment or a portion that was not paid within 30 days of the due date, according to U.S. Department of Education guidelines.

The late fees haven't been charged for decades on direct federal loans and loan servicers have heard no discussion from the Education Department about changing that soon, said Scott Buchanan, the executive director of Student Loan Servicing Alliance, an industry trade group.

Paying for grad school:How the FAFSA differs for graduates

Start budgeting to make payments and look at options

GreenPath is recommending applying for a federal income-based repayment plan if your financial situation makes it hard to make federal student loan payments. Some options exist for those dealing with unaffordable federal student loan payments. See GreenPath for a blog on what borrowers need to know about the ending of the on-ramp program.

Student loan borrowers thought they'd have some relief under a new income-driven repayment initiative, called the SAVE plan, which was introduced last year. But that plan has it several roadblocks in the courts after a Republican-led effort to halt the plan.

On Aug. 28, the U.S. Supreme Court declined to revive President Joe Biden's popular student loan debt relief plan by turning down the administration's request to temporarily lift a judicial decision that paused the SAVE plan.

The plan would have sent monthly payments down to as low as $0 for some borrowers, helped millions of others lower their monthly payments, and speed up the process for loan forgiveness.

The U.S. Department of Education has told borrowers that it is "working to finalize new regulations that include who may receive loan forgiveness." All borrowers who have at least one Education Department-held loan, regardless of the status of their loans, received an email in August that explained the potential debt relief. Borrowers had until Aug. 30 to opt out of it. This information applied only to commercially managed Federal Family Education loans or Perkins Loans held by institutions.

On Sept. 3, though, seven Republican-led states filed legal challenges to block the upcoming Biden student loan initiative, which would have canceled more student loan debt.

Currently, Kantrowitz said borrowers who are facing serious financial difficulty can consider applying for an economic hardship deferment, unemployment deferment or general forbearance, if applicable.

In general, he said, it is better for student loan borrowers to make payments if they can. "If a borrower's income is low compared with their student loan debt, they should consider an income-driven repayment plan, which bases the monthly payment on a percentage of their discretionary income," he said.

During the on-ramp period, a borrower's loans were automatically put in a forbearance after missing three payments.

Another temporary effort called "Fresh Start" offered special benefits to help borrowers with loans in default return to a current repayment status but that program ends Sept. 30, too. More borrowers would be eligible to enroll but they need to move quickly.

Under Fresh Start, the Education Department notes, many borrowers with older loans will have access to repayment plans that provide more affordable monthly payments than when they first defaulted on their loans.

Some can enroll in affordable income-driven repayment plans with monthly payments that could be as low as $0, the Education Department said, and potentially qualify for IDR forgiveness and Public Service Loan Forgiveness.

Borrowers must sign up for Fresh Start by Sept. 30 to get their loans out of default and take advantage of the program’s key benefits.

Eligible borrowers can access myeddebt.ed.gov or call 800-621-3115 to enroll.

Borrowers who haven't been steadily paying their student loan bills are better off doing their research now to prepare for the big change in October.

"Talk to your servicer about repayment options that may be available to lower your monthly payment," said Buchanan, of the Student Loan Servicing Alliance.

"Don’t wait — put a plan and budget together today so you can stay on track and protect your credit," Buchanan said.

About half of borrowers in repayment — some 17.8 million people with $706 billion in loans — were current on their federal student loan payments as of Jan. 31, according to a new report by the U.S. Government Accountability Office.

Nearly 30% of borrowers — or 9.7 million people — were past due on their payments. The Department of Education typically would report borrowers as delinquent to credit reporting agencies when they become 90 days past due on their loans. But the GAO report noted that the agency was forgoing this practice for the first 12 months of repayment resumption — or from October 2023 through September.

Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X (Twitter) @tompor.