A Safeguard for Student Loan Repayment, but with Consequences

When the Department of Education prepared for student loan payments to resume, they knew it wouldn’t be easy, so they included safeguards for struggling borrowers. The reality, unfortunately, was that the transition back to payments was even worse than predicted. Perhaps worse, one of the principal pressure-releases for borrowers strapped for cash may not work as well as originally thought, and could have unintended consequences for those who use it. 

On-Ramp Transition Period: a Backdoor when You Can’t Afford Your Payment

If you can’t afford to make your monthly federal student loan payment, there’s supposed to be a relatively painless last resort option: don’t pay. This is part of the Dept. of Ed.’s “On-Ramp Transition Period,” which lasts until Sept. 30, 2024, and shields borrowers with missed or late payments from going into penalty or default. Presumably, this would allow struggling borrowers to not have to make payments they can’t afford while the government fully implements the SAVE plan, which will require borrowers to pay less of their disposable income than current plans. It also gives the White House more time to come up with a new long-term approach to the student debt crisis in the wake of the Supreme Court’s decision to block blanket student loan forgiveness.

Unintended Consequences: The Student Loan On-Ramp and Your Credit Score

The On-Ramp seems solid on paper, but—unfortunately—the Dept. of Ed. isn’t the only one looking at your loans: enter the credit agencies. Studentaid.gov says that the On-Ramp:

“…prevents the worst consequences of missed, late, or partial payments, including negative credit reporting for delinquent payments for twelve months. However, payments are still due, and interest will continue to accrue (add up). We will not report you as delinquent during the on-ramp, but we do not control how credit scoring companies factor in missed or delayed payments.”

The rub is that, even if the Dept. of Ed. doesn’t report you to a credit agency for missing a payment, the credit agency will still know. The credit agencies—Equifax, Experian, and Transunion—monitor all of your financial activity all of the time. If you don’t make your payment, the government won’t penalize you, but your interest will still accrue. Agencies can see that your loan balance increased, because there wasn’t a payment that offset the interest, and infer that you missed your payment. This isn’t unique to student loans, either; if you’ve missed a car or house payment, the same thing can happen. Even if you rectify the missed payment with the bank before they report it, the credit agency may have already changed your score. 

If you’re struggling to make your student loan payment, don’t wait for your due date to come and go. Your student loan professional can look at your specific situation and tell you what options you should have before you miss your payment. While the On-Ramp can benefit some borrowers, it should be considered a last resort; make sure you have all the facts before you take it.