As COVID-19 spread throughout the United States in early 2020, our country went into lockdown. As “non essential” businesses shuttered (either temporarily or permanently) beginning in March, millions of Americans were laid off. By May 2020, the nation’s unemployment rate had risen to nearly 15%.
In response to these challenges, Congress passed the CARES Act, which was signed by President Trump on March 27, 2020. The CARES Act provided relief for small businesses and laid off workers. One of it’s most well-known provisions concerns the repayment of federal student loans.
For most borrowers, all federal student loan payments, and accrual of interest, has been waived until September 30, 2020. Student loan borrowers don’t have to make any arrangements to defer / postpone their payments. For most borrowers, this is implemented automatically. Additionally, private collection agencies, which collect on unpaid student loans on behalf of the Department of Education, have been instructed not to make collection calls or accept payments on these debts.
In many respects, this is a very positive thing for most borrowers. After all, given the unprecedented economic difficulties which millions of Americans are facing (including an unemployment rate of more than 14%), any relief is beneficial. At the same time, there has been quite a bit of confusion around how student loans will be reported to credit bureaus, and what sort of impact it will have on credit scores.
Although federal student loan payments were paused by the federal government, borrowers who would normally be paying are supposed to be reported as having paid on-time every month. Basically, this means that borrowers should not see any hit to their credit score, as a result of payments being paused. Of course, if your loan was already in default (before the CARES Act was passed), you won’t be marked as having paid your loans on time – however, debt collectors won’t be hassling you.
It’s important to note that the CARES Act specifically states that accounts for which payments were suspended (which would have otherwise been applicable, were in not for the CARES Act), should not be marked as in forbearance, or any other altered payment status. Rather, they should be listed as having been paid on time. Specifically, the law states that “…any payment that has been suspended is treated as if it were a regularly scheduled payment made by a borrower.” The US Department of Education has confirmed a similar understanding of this law. Continued on time payment history has a positive impact on your FICO credit score, since your payment history counts for 35% of credit score points under FICO.
However, some borrowers are reporting major drops in their credit scores after the rules of the CARES Act was applied to their student loans. While Great Lakes (one of the major servicers whose borrowers saw their credit scores drop) initially denied that their credit reporting was flawed, they later acknowledged that a mistake had been made, and promised to retroactively correct credit reporting.
In the meantime, however, attorneys representing those whose credit scores were damaged by this innacurate reporting, filed a class action lawsuit in federal court. They sued Great Lakes, the three major credit bureaus (Equifax, Experian and TransUnion), and VantageScore.
VantageScore is a credit scoring model created by the bureaus (working collaboratively). If you use Credit Karma or Credit Sesame, the score you’re being provided with is your VantageScore. It is important to note that most lenders don’t use VantageScore, rather, they use some version of FICO, which is an alternative credit scoring model. FICO is far more widely used than VantageScore, though VantageScore has gained some traction in recent years.
In the lawsuit, the plaintiffs claimed that Great Lakes and Equifax reported their student loans as being deferred – rather than paid on time, the reporting which was required by law. The plaintiffs argued that this had unfairly reduced their Vantage credit scores, which failed to take into account the relief provided by the federal government. One of the named plaintiffs claimed that the drop in his credit scores had caused him to postpone the purchase of a home.
Like most lawsuits, this case will probably settle at some point. Yet, it’s understandable to have concerns about how your credit might be impacted.
It’s really crucial to understand how the CARES Act impacts your FICO score, since FICO scores are so widely used. Since payments were postponed by federal law, there is not supposed to be any impact on your FICO scores. Payments should be listed as on time, not late or otherwise altered.
To date, we’re not aware of people’s FICO scores being negatively impacted by the CARES Act. It seems like the issue with Great Lakes and Equifax listed accounts as deferred was a unique mistake, and the VantageScore model is inherently flawed in scoring deferred accounts (i.e. reducing borrower’s credit scores). Now that there’s been a lawsuit, other student loan companies will probably be more careful about how they report student loans while the CARES Act is in place.
As always, we suggest monitoring your credit reports regularly, and keeping a watchful eye on your student loans. You can keep an eye on your Equifax and TransUnion credit reports through Credit Karma, and Experian through Experian’s website.
Remember that the VantageScore, offered by Credit Karma, is not used by most lenders. However, seeing how your student loans are listed on your credit reports is very important. If anything looks unusual (such as, you’re listing in deferment while the CARES Act is in place), you should contact your student loan servicer, and ask them to correct this issue. If you still feel like your accounts are being reported inaccurately, you may want to speak to a consumer rights attorney.
