The coronavirus stimulus bill, if it passes Congress, may grant a six-month forbearance period to the millions of Americans with federal student loans.
While the complete details are not yet known, federal student loan borrowers could get a break from their monthly payments until Sept. 30, 2020, with any accrued interest also waived.
But what does all this mean for your credit score? We have good news and bad news.
Below, CNBC Select spoke to two experts about what postponing student loan payments could mean for your credit score.
How does forbearance affect your credit score?
"The fact that you're in forbearance isn't considered in your scores," financial expert John Ulzheimer, formerly of FICO and Equifax, tells CNBC Select. "But if you're already delinquent or in default on the loan, it's still considered a negative entry."
This means that if, prior to forbearance, you were late or overdue on your loan payment, it will still result negatively on your credit report.
Despite there being no impact to your credit score when your loan goes into forbearance, "if you can pay your loan and it doesn't cause financial stress to do so, keep making your payments," Ulzheimer says. "If not, you're just keeping your student loans around longer."
It's also worth mentioning that with the stimulus package (known as the CARES Act), student loan borrowers should look out for any specific language in the bill that offers a guarantee rather than just assuming this will automatically take effect.
"I've been told by several servicers that students have to actually request the forbearance rather than just assume they've been placed in a forbearance program," Ulzheimer says.
For example, the federal student loan servicer, Great Lakes, announced that it will automatically grant a non-interest forbearance period for borrowers, but only those who are 30 days behind on their payments. Therefore, it's important to determine what kind of assistance will apply to your specific situation.
How long does student loan debt stay on your credit report?
It depends. If you make all of your payments on time, student loan debt does not necessarily cause irrevocable harm to your credit score.
But if you end up falling behind on payments or defaulting on your student loan, "the negative account information will likely appear on your credit file for seven years from the original date that the account was first reported as past due," Bruce McClary, a spokesman for the National Foundation for Credit Counseling (NFCC), tells CNBC Select.
If you are someone who can currently afford to make your monthly student loan payments, it may be a better idea not to prolong your debt in this potential six-month forbearance or deferment period. That way, you remain on top of your debt and lower your risk of falling into delinquency.
How can student loan debt on your credit report affect your credit score?
Student loans are considered installment loans, which impact your credit score differently than credit card debt does. Sometimes, carrying a student loan balance can actually help your "credit mix," by adding variety to the kind of loan products you have. But this is a relatively small factor in how your score is calculated.
The biggest key factor, making up about 35% of your score, is on-time payments. This applies to all revolving and non-revolving lines of credit, including your student loans. No matter the size of your loan debt, if you're having trouble making your student loan payments each month, you'll see this reflected in your credit score.
"Any delinquent account that appears on your credit report can have a noticeable and negative impact on your score," says Ulzheimer.
Last, having high student loan payments each month can make it harder to pay off your credit card balance. If you end up not paying off your credit card balance and carrying it into the next month, that will increase your credit utilization rate, the second-largest factor in calculating your credit score.
Which to pay off first: Student loan debt or credit card debt?
The consequences of not paying your federal student loans can be severe, and the collection process will likely have a devastating impact on your income, often much more so than with credit cards.
"There are several affordable repayment options for federal student loans, which makes it helpful in situations where payments have to be prioritized based on most urgent needs," McClary says.
McClary recommends finding an affordable repayment option through your federal student loan servicer, or perhaps refinancing if your loans are private. Then, work with a nonprofit credit counselor to keep your credit cards on track.
"That way it's not a choice of one over the other," he explains.
But you should be aware that paying down credit card debt first may help your budget since credit cards typically have higher interest rates than student loans. Paying down credit card debt will also lower your credit utilization rate, which boosts your credit score.
If you choose to prioritize paying your student loans first, you can transfer an existing credit card balance to a 0% APR credit card, such as the Citi Simplicity® Card, to save on interest. This card in particular has no late fees whatsoever and no interest for the first 12 months on purchases and the first 21 months on balance transfers (after 14.74% to 24.74% variable APR).
The best balance transfer cards are usually reserved for those with good or excellent credit, but there are options available for fair credit as well.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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March 26, 2020 at 08:57PM
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Stimulus bill may waive federal student loan payments for 6 months—here's what that could mean for your credit score - CNBC
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