Borrowers with federal student loans who have been late or missed their monthly payments should be aware that continuing this pattern could negatively impact their credit reports.

For the past year, borrowers experiencing financial strain have been granted a temporary relief from damaging credit reports. However, this grace period, known as a “student loan on-ramp,” will conclude on September 30. After this date, loan servicers will begin reporting any missed or incomplete payments to credit reporting agencies.

According to a report from the U.S. Government Accountability Office released in mid-August, around 6.7 million borrowers with delinquent federal student loans were not penalized on their credit reports during the on-ramp period. This respite followed the resumption of monthly payments in October 2023.

During the on-ramp, negative reporting was avoided for those who failed to make payments on their federal student loans by placing them into retroactive forbearance every three months for up to a year, explained Mark Kantrowitz, a specialist in student loans.

Importantly, interest continued to accumulate during this forbearance. Consequently, borrowers may find that their monthly payments are higher now due to this additional interest.

Potential Effects on Credit Scores as the On-Ramp Period Closes

Currently, impacted borrowers must prepare to resume their monthly federal student loan payments starting October 1.

Starting in October, serious repercussions will apply for those who miss payments. This includes a delinquency note on their credit report, which may lead to a decline in credit scores.

How much could credit scores be affected? The answer varies for everyone, relying on factors such as the extent of delinquency and the amount overdue, as noted by John Ulzheimer, a credit reporting and scoring expert.

For some borrowers with good credit, the score could drop by over 100 points, depending on their overall credit history. “Alternatively, it could be no drop at all, based on your situation,” remarked Ulzheimer, who previously worked with FICO and Equifax.

“Those with higher scores will see a more significant impact,” Ulzheimer stated. “Conversely, someone with already poor credit may experience little to no impact.”

Ulzheimer shared that in his own test simulation, he faced a credit score decrease of around 150 points.

Borrowers have some leeway, as the federal government reports delinquencies on federal student loans only after 90 days of non-payment. Therefore, missing one payment for several days or weeks may not immediately have consequences and allows time to correct course.

Why Some Will Experience Higher Credit Card Interest Rates

Kristen Holt, president and CEO of GreenPath Financial Wellness, based in Farmington Hills, pointed out that many borrowers might not fully grasp the extensive effects that delinquency on federal student loans can have once the on-ramp period is over.

“A drop in your credit score could occur,” Holt indicated, “and that, in turn, might increase your credit card interest rates.”

A reduced credit score gives credit card companies justification to hike up your interest rates.

Average credit card rates have surged to record highs in 2024. Currently, the average rate sits at 20.78%, as reported by Bankrate.com, which has tracked credit card rates since September 1985.

Many retail credit cards charge even higher than this average. Moreover, individuals with poor credit often encounter much steeper overall interest rates.

“Those with lower credit scores can end up facing extraordinarily high credit card rates, sometimes exceeding 30%,” stated Ted Rossman, a senior industry analyst for CreditCards.com and Bankrate.com.

Even if you were fortunate to receive a limited-time 0% interest offer on a credit card, your credit score could put that at risk. For instance, the Discover it card offers an introductory rate of 0% for 15 months on purchases and balance transfers. After this period, the annual percentage rate could soar between 18.24% and 28.24%, contingent on your creditworthiness. This APR will adjust based on market conditions linked to the prime rate.

Holt pointed out that for the past year, borrowers who missed payments on federal student loans have not faced penalties on their credit scores, so many recent graduates may not realize the widespread implications for interest rates on other loans.

Borrowers carrying federal student loan debt enjoyed over three years of payment relief due to a pandemic-related suspension. This suspension concluded, necessitating the resumption of payments in October 2023.

What Was the Purpose of the On-Ramp Program for Student Loans?

The on-ramp initiative was established to prevent any actions that could lead to a federal student loan being deemed in default or otherwise negatively impacting a borrower’s credit.

This approach aimed to assist borrowers who had not made payments for an extended time and might face a heightened risk of defaulting once the pause was lifted.

However, it’s uncertain how many student loan borrowers, preoccupied with beginning new careers, managing families, or facing financial struggles, actually monitored the changes and complexities connected to their loans.

Is anyone aware of the one-year “on-ramp” program for student loan relief?

Do they realize that their credit scores could take a nosedive now?

Borrowers who missed payments or made partial payments during the past year, while the “on-ramp” program was in effect, did not have those loans reported as delinquent to credit bureaus.

Currently, borrowers are starting to receive payment statements, as mentioned by Holt, but some may not be overly worried since any missed or late payments have not affected their credit scores.

“Many individuals are diligent about monitoring their credit scores, so they aren’t noticing a decline,” Holt noted. “I’m not sure that people realize missed payments will impact their credit scores until it’s too late.”

At this moment, there may not be any late fees enforced.

The Higher Education Act permits the Education Department to impose late fees on overdue balances not paid within 30 days past their due date. However, the department does not apply late fees to Direct Loans.

On the other hand, borrowers could encounter late fees related to Federal Family Education Loan PLUS Loans that are not managed by the Education Department.

According to U.S. Department of Education guidelines, the department can charge a late fee of up to 6 cents per dollar (or 6%) for monthly payments or portions that have not been paid within 30 days of their due dates.

Late fees have not been charged on direct federal loans for decades, and industry representatives have not heard any discussions from the Education Department about changing this policy soon, stated Scott Buchanan, executive director of the Student Loan Servicing Alliance, an industry trade group.

Begin budgeting for payments and explore options

GreenPath recommends applying for a federal income-based repayment plan if your financial situation makes it challenging to meet federal student loan payments. There are options available for those struggling with unaffordable loan payments. Refer to GreenPath’s blog for essential information about the conclusion of the on-ramp program.

Student loan borrowers had hoped to find relief through a new income-driven repayment initiative, known as the SAVE plan, which was introduced last year. Unfortunately, this plan is currently facing several legal challenges from Republican-led groups aiming to block it.

On August 28, the U.S. Supreme Court declined to restore President Joe Biden’s widely supported student loan debt relief plan by denying the administration’s request for a temporary lift on a judicial decision pausing the SAVE plan.

The plan intended to lower monthly payments to as low as $0 for some borrowers, assist millions in reducing their monthly payments, and expedite loan forgiveness processes.

The U.S. Department of Education has communicated to borrowers that it is “working to finalize new regulations” about eligibility for loan forgiveness. All borrowers with at least one loan held by the Education Department were informed in August about potential debt relief via email, with a deadline to opt out by August 30. This information applied only to commercially managed Federal Family Education loans or Perkins Loans held by institutions.

On September 3, seven Republican-led states filed lawsuits to block the upcoming Biden student loan initiative that aimed to cancel additional student loan debt.

As of now, Kantrowitz suggests that borrowers facing financial challenges might consider applying for an economic hardship deferment, unemployment deferment, or general forbearance, if applicable.

Generally, he advises student loan borrowers to make payments if possible. “If someone’s income is relatively low compared to their student loan debt, they should think about an income-driven repayment plan that calculates monthly payments based on a percentage of their discretionary income,” he explained.

During the on-ramp period, if a borrower missed three payments, their loans were automatically placed in forbearance.

An additional temporary initiative called “Fresh Start” provided unique benefits to assist borrowers in returning to a current payment status if their loans were in default, but this program also concludes on September 30. More borrowers may qualify for enrollment, but actions should be taken swiftly.

According to the Education Department, under Fresh Start, many borrowers with older loans will have access to repayment plans that allow for more manageable monthly payments compared to when they initially defaulted.

Some borrowers could enroll in affordable income-driven repayment plans that might have monthly payments as low as $0, and they may qualify for IDR forgiveness and Public Service Loan Forgiveness.

Eligible borrowers must enroll in Fresh Start by September 30 to remove their loans from default and take advantage of the program’s important benefits.

Eligible borrowers can visit myeddebt.ed.gov or call 800-621-3115 to secure enrollment.

Those who have not been consistently paying their student loan bills need to start their research now, in preparation for the significant changes coming in October.

“Consult your servicer regarding repayment options available that may lower your monthly payment,” advised Buchanan from the Student Loan Servicing Alliance.

“Do not procrastinate — create a plan and budget today to stay on track and protect your credit,” Buchanan urged.

According to a recent report by the U.S. Government Accountability Office, about half of borrowers in repayment—approximately 17.8 million individuals with $706 billion in loans—were current on their federal student loan payments as of January 31.

Nearly 30% of borrowers, or 9.7 million individuals, were overdue on payments. The Department of Education typically classifies borrowers as delinquent to credit reporting agencies once they fall 90 days behind. However, the GAO report indicated that the agency will not report delinquency for the first 12 months of repayment resumption, from October 2023 through September.

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