The Department of Education announced Monday that the Federal Student Aid (FSA) will restart collections on defaulted student loans beginning May 5. Even before this news, millions of borrowers were already seeing their credit scores plunge in recent months, and loan servicers are warning that a record number of borrowers are at risk of defaulting by the end of the year. I recently covered the basics of what you need to know about the upcoming changes, as well as how to prepare for them. Now, let’s dive a little deeper into how borrowers suffering through collections can navigate their financial future.
What the end of the pause means for your finances
“Many people have been feeling like they’re in some sort of personal financial recession for years now,” says Lauren Bringle, an accredited financial counselor at credit-building platform Self Financial. And if you’ve been carrying credit card debt, you know that those higher interest rates may have caused what you owe to increase significantly.
Factor in the cost of many monthly expenses increasing—groceries, gas, eggs—all while salaries have stayed stagnant. “Now add in that student loan payments have resumed, and for some, that means hundreds of dollars in extra expenses monthly,” Bringle notes. Especially after the five-year pause on payments that began during the COVID-19 pandemic, many borrowers are having to significantly readjust and re-evaluate their budgets. With all of the additional costs, it’s left millions of Americans stretched beyond their means.
Strategies to protect and rebuild your credit
Here’s what you can do to navigate a hit to your credit score.
1. Free up money wherever you can
If your income is limited and you simply don’t make enough to cover your student loan payments, Bringle suggests an income-driven repayment plan for federal student loans. “The federal student loan landscape has been rapidly changing, but you may be able to qualify for lower monthly payment options (even down to $0/month in some cases) based on your income,” advises Bringle. You can learn more and apply at studentaid.gov here.
2. Prioritize your credit
“Credit is an essential part of your overall financial profile because it opens the door to long-term financial goals, such as renting an apartment or securing a mortgage,” Bringle explains. Missed loan payments can significantly impact your credit because payment history accounts for 35% of your FICO credit score, making on-time payments critical.
If your credit has already taken a hit due to missed student loan payments, consider alternative ways to rebuild. For instance, something as small as implementing this payment schedule helps to send your credit score in the right direction.
Additionally, Bringle recommends organizations like Operation Hope, NFCC, and AFCPE, where credit counselors can review your income, expenses, debts, and overall financial picture to help you create a personalized budget and spending plan.
3. Keep building positive money habits
Regardless of where you stand financially, focus on developing positive short-term habits. Especially in the face of something like student debt, it helps to control whatever you can.
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Stick to your budget. “As you’re setting up your financial goals, make sure you have a really clear view of your overall finances,” says Bringle. “Your budget plays an important role in helping your credit score, because it helps you track your expenses, and ensures that you are able to pay your monthly payments on time, and in full.” Here’s my guide to evaluating and making strategic cuts to your budget.
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Make payments on time. Setting up automatic payments can help ensure you don’t miss due dates, which would negatively impact your score. “Depending on the conditions of your student loans, borrowers usually have up to six months after graduation before they have to start making payments,” Bringle notes. “Be sure to check your loan and know exactly when your first payment is due so you can plan ahead and pay on time, since payment history is a critical piece to building and maintaining healthy credit.” To find out exactly how much you’re expected to pay, head to studentaid.gov.
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Hack your credit utilization. Credit utilization is the second-largest factor of your FICO score, so it’s important not to use too much of your available credit. The general rule is to stay below the 30% threshold, but even lower is better. Using more than 30% of your available credit can affect your credit utilization, which could ultimately decrease your score. For example, if your credit limit is $1,000, you should not put more than $300 on your credit card before paying down the balance.
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Review your credit report regularly. Checking your report gives you a clear understanding of your credit health and what might be impacting your score. You can review payment history, recent balances reported to credit bureaus, accounts under your name, and identify negative items like collections that need to be addressed. Free copies of your credit reports from Experian, Equifax, and TransUnion are available at annualcreditreport.com.
Looking ahead
Bringle emphasizes the importance of preparation: “Make sure your budget is set up to support your payments, start setting aside the payments from your monthly budget to build the habit, and set up autopay if you can to reduce the chances of a late payment.”
By taking proactive steps now, you can protect and rebuild your credit score as much as possible before student loan collections resume.