The Impact of the Student Loan Payment Pause on Borrowers and Credit Scores
Impending Challenges as Student Loan Payment Pause Nears Conclusion
According to finance.yahoo.com, the pause in student loan payment over the past three years has played a significant role in boosting Americans’ credit scores with the average score increasing by 15 points and those with previous credit issues seeing a 30-point rise according to the latest Yahoo Finance updates.
This improvement is attributed to the ability of borrowers to allocate funds previously earmarked for student loan payment pause toward other financial goals, such as paying down debts (40%), growing savings (37%), investing (28%), or saving for a home (24%), as revealed by a survey from US News & World Report during the student loan payment pause that began in March 2020.
However, with student loan payment pause set to resume in October, these extra funds will no longer be available for other financial commitments, potentially impacting borrowers’ credit scores. Some may face a significant increase in their monthly expenses, ranging from $100 to $500 or more, as indicated by Tom Aliff, risk advisory leader at Equifax. A recent TransUnion study found that about half of borrowers will need to pay more than $200 monthly and 1 in 5 will face payments exceeding $500.
Mitigating Financial Challenges Post-Student Loan Payment Pause
Additionally, the average American’s savings rate has decreased from 7.5% between 1981 and 2019 to just 3.5%, making it challenging for individuals to cover the increased expenses. Many student loan payment pause borrowers have also acquired additional debt during the pandemic, including mortgages and car loans, further complicating their financial situation.
While the government is providing some relief by not reporting late and missed payments for the first 12 months after the repayment restarts, it’s essential for borrowers to explore repayment options, loan consolidation, and income-driven repayment plans. The impact on credit scores remains a concern, as delinquencies are a crucial factor affecting credit profiles, according to Aliff. As the resumption of student loan payment pauses approaches, borrowers are advised to visit the Federal Student Aid website, StudentAid.gov, for guidance on loan servicing, consolidation, and repayment plans.