It’s Time to Pay Your Student Loans. What Happens if You Fall Behind?

With federal student loan payments due again for the first time in nearly four years, financially stretched borrowers may be concerned about the consequences of missed payments.

Many student loan borrowers have taken on more debt during the payment pause, and their total monthly obligations — even without their student loan bill — now exceed what they were paying before March 2020, when the payments were put on hold, according to an analysis by TransUnion, one of the Big Three credit-reporting companies.

“Adding the new payments to the mix will be a noticeable payment shock,” said Liz Pagel, senior vice president of consumer lending at TransUnion. “Many consumers do have the excess funds to make these payments, but some could struggle.”

Thankfully, there are some safeguards for those at risk: Borrowers who fail to make timely payments should see relatively minimal changes to their credit standing, at least for the year after repayment begins. And there’s a bright spot for those who begin chipping away at their debts again: Their credit scores may tick slightly higher.

In ordinary times, missed payments on federal student loans are reported to the Big Three credit-reporting companies after 90 days of nonpayment. But through Sept. 30, 2024, the Biden administration has loosened the rules: Missed payments will not be reported to the credit-reporting companies as delinquencies, nor will borrowers be considered in default. Instead, missed payments will be reported as a forbearance, and any skipped payments will be tacked onto the end of the loan term.

Nevertheless, interest will generally continue to accrue on missed payments, and the loan balance won’t decline and may even rise. That’s why skipping payments may still pose a slight drag on your credit score, though the precise effect will depend on your circumstances.

The most damaging consequences won’t come until next year — and will affect only borrowers who continue to miss payments after the Biden administration’s yearlong “on-ramp” period ends.

“It is pretty good news for borrowers because those who now have the ability to start repaying will see a positive impact,” said Rikard Bandebo, executive vice president and chief product officer at the credit score company VantageScore, “and those that don’t yet have the means to start repaying have about a year to plan.”

So what will show up on your credit report if you miss payments in the months ahead? Two of the largest score creators, FICO and VantageScore, use a handful of data categories to generate their three-digit scores, which range from 300 to 850; scores of at least 670 at FICO and 661 at VantageScore are considered “good.”

At both score producers, the most important category is your payment history (which accounts for 35 percent of your FICO score), followed by how much you owe overall (30 percent of your FICO score). Missed payments can severely damage your score, but a forbearance isn’t viewed unfavorably.

“As long as the student loan is reported with no delinquency during this on-ramp period, then the payment history dimension of the FICO score calculation will not be negatively impacted,” said Ethan Dornhelm, vice president for scores and predictive analytics at FICO.

But FICO scores also consider the amounts that borrowers pay down on installment loans. A declining balance may help lift your score, but the reverse can hurt.

“In a scenario where the loan is not being paid down and interest is accruing, if the increasing outstanding balance on that loan is reported to the credit bureaus, that could result in a modest negative impact to the score,” Mr. Dornhelm said.

Interest will accrue on most missed payments. When that happens, the borrower’s next payment will be applied toward the accrued interest first until the interest is paid off, said Scott Buchanan, the executive director of the Student Loan Servicing Alliance, an industry group.In some cases, the monthly bill may increase. (Borrowers in income-driven repayment plans who miss payments generally will not see their monthly obligation rise, because their payments are based on income and family size.)

Where to Find Your Credit Reports and Scores

Borrowers who do miss payments should monitor their credit reports and scores to ensure that everything is being reported correctly — mistakes happen, and this type can be costly. A lower credit score may translate into a higher interest rate on your auto loan, for example, or lenders may choose to deny you credit altogether.

If you believe a missed student loan payment was improperly recorded, contact your loan servicer and let it know. You can also file a dispute with whichever credit bureau — Experian, Equifax or TransUnion — has the erroneous information on your report to get it fixed.

All consumers can receive a free copy of each of their three credit reports weeklythrough AnnualCreditReport.com or by calling 877-322-8228.

VantageScore and FICO make their scores available free of charge through financial institutions and other providers.

Borrowers who are having trouble making their payments should explore their options, particularly income-driven repayment plans, which base payments on income and family size. The newest income-driven program, SAVE, is expected to generate the lowest payments for most borrowers, and can be as low as $0 for those with lower incomes.

Starting next October, borrowers who miss payments will be reported delinquent three months later (so, practically speaking, borrowers have some time to catch up if they fall a month or two behind). But at that point, a missed bill may significantly lower your credit score. At VantageScore, it may cost you up to 80 points, which can impede “your ability to get a certain product, or impact the pricing or the amount of credit they are eligible for,” Mr. Bandebo said.

“It is better to try to be proactive,” he added, “and take advantage of any programs that may be available.”