Biden warns credit agencies not to penalize student-loan borrowers for missed payments or forbearances

In particular, Cordray wrote that it would be “inappropriate” for credit-scoring models to rely on things like a small uptick in loan balance due to interest accruing, periods of forbearance, monthly payment amount or other signs of a reduced or missed payment, as a sign of creditworthiness during this period. 

“These actions are taking place in a fundamentally different context than any other time and are a substantially less reliable indicator of unwillingness or inability to pay,” Cordray wrote in the letter obtained by MarketWatch. 

Is the resumption of student loan payments impacting your credit score? Email us: jberman@marketwatch.com. 

The letter comes after weeks of complaints from student-loan borrowers and advocates over the resumption of federal student loan payments. Beginning on October 1, 28 million borrowers entered repayment after a more than three-year pandemic-era pause. In the months leading up to and since payments have resumed, borrowers have complained of long call wait times and challenges receiving accurate information about their loan payments. 

As part of a year-long on-ramp to smooth the transition, the White House said the Department of Education wouldn’t report borrowers who struggle to make payments during this period as delinquent or in default to credit bureaus or refer them to debt-collection agencies. So far, the agency has heard anecdotes of small impacts on borrowers’ credit scores during the return to repayment, but officials don’t have any suggestion that the issue is widespread, according to an administration official. 

Cordray’s letter is a “proactive measure” aimed at ensuring that borrowers trying to repay their loans don’t suffer any negative credit impacts, the official said. The letter does not specify how long credit agencies should not take issues like missed or reduced payments into account when determining credit scores.  

Concern about how errors could impact credit score

“We are concerned that servicing errors and other unique factors could impact the accuracy of your credit models and consumer data about borrowers during the current special circumstances of the return to repayment,” Cordray wrote.

Servicers, who are borrowers’ first point of contact when repaying their student loans, have pointed to a lack of funding as one reason why borrowers may struggle to get a hold of customer service staff or have their paperwork processed quickly. Congress didn’t fulfill the Department of Education’s full funding request last year. 

In addition, servicers have said the sheer complexity of returning so many borrowers to repayment at once combined with the government’s decision to introduce new programs during this period in part explains borrowers’ challenges. 

A consumer’s credit score is based on a slew of data, including payment history on outstanding loans. It has implications for how people are evaluated for credit, including whether they receive a loan and how much they pay for it if they do secure one. The idea is that past or current payment behavior is indicative of how likely they are to repay a future loan. 

But the payment behavior of student-loan borrowers during the return to repayment does not “carry the same creditworthiness implications as they do for other products,” because of the unique circumstances of the period, Cordray wrote. He noted that multiple servicers provided inaccurate disclosures to roughly 100,000 borrowers. One servicer failed to send timely billing information to nearly 2.5 million borrowers, he added. 

Part of the Department of Education’s remedy to these issues was to instruct servicers to put borrowers into an administrative forbearance, which means the borrower isn’t required to make payments on their loan, while the errors are being resolved, Cordray noted in the letter. 

“As a result of these servicer errors, a borrower’s lack of payment does not necessarily reflect their ability or intention to repay their loan,” he wrote. In addition, because the errors aren’t uniform, Cordray wrote that “similarly situated borrowers are experiencing an unequal set of repayment experiences and I am concerned this could result in unequal credit outcomes based on their servicer.”  

Though missed payments can typically damage a borrower’s score, credit scoring companies have said they don’t necessarily view student-loan forbearances negatively. Still, there’s a chance that if the companies use their typical modeling and reporting practices during this period, borrowers could see credit-score impacts, the administration official said. The letter is “asking these companies to re-evaluate their practices to take into account these unique circumstances,” the official added. 

In the letter, Cordray noted that many borrowers may have made changes to their payment plans during this period. More than 40% of borrowers had their loan transferred to a different servicer during the pause, which could require them to update their payment information or re-apply for a payment plan. In addition, borrowers’ financial circumstances may have changed during the pandemic, pushing them towards a different and more affordable option. 

Finally, the Biden administration introduced a new payment plan called SAVE that millions of borrowers have sought out during the return to repayment. While the paperwork for enrolling in these plans is being processed, borrowers are often placed into a forbearance. 

“We understand that credit scoring models and lenders can, in some cases, view these forbearances as an indication that borrowers are unable or unwilling to make loan payments,” Cordray wrote. “However, these instances actually suggest borrowers are taking proactive steps to engage with their loans and are on the path to successful repayment.” 

Some borrowers’ credit scores dropped at the beginning of the payment pause

In the past, student-loan borrowers’ credit scores have been impacted by the pandemic-era changes to repayment. At the beginning of the payment pause in spring of 2020, roughly 5 million student-loan borrowers saw their credit scores fall despite instructions from Congress that the payment freeze shouldn’t impact borrowers’ credit scores. 

At the time, one servicer said the way it was reporting information about the pause to credit bureaus could have negative consequences for borrowers’ scores. They adjusted the error when it came to light. 

Now, more than three years later, Cordray is warning credit agencies and scoring companies to think differently about the behavior of student-loan borrowers because of the context. 

“Standard credit reporting practices and credit scoring models are unlikely to accurately reflect the unique situation millions of borrowers are experiencing during this unprecedented return to repayment,” he wrote. “As a result, we strongly urge you to reevaluate your approach, and ask that a borrower’s creditworthiness not be evaluated by a system designed for pre-pandemic circumstances.”