Those who have borrowed federal student loans eagerly await the removal of up to $20,000 from their balances, as announced in August. However, a recent decision by a federal appeals court has paused loan forgiveness, leaving many wondering whether they’ll be seeing any relief after all.
Read on for the latest news, including how these changes could affect your credit score.
The federal appeals court that paused debt relief plans did so in order to consider a challenge brought on by six Republican-led states. Opponents to the relief package claim that it is not within the Biden administration’s authority to make the far-reaching decision.
Other lawsuits against Biden’s plan are also being pursued, but the federal appeals case is the one responsible for the current delay.
While the temporary hold may seem like a setback, the Biden administration has explained that all activities related to preparing for loan forgiveness will continue as normal.
Additionally, eligible borrowers are still being encouraged to apply for student debt relief. The applications will continue to be reviewed and prepared for delivery to loan servicers.
Those eligible for a $10,000 debt forgiveness include individuals who earned less than $125,000 in either 2020 or 2021 and married couples or heads of households who made less than $250,000 in those years.
If a borrower also received a federal Pell grant while enrolled in college, they may be eligible for up to $20,000 of debt forgiveness.
The Department of Education has released additional provisions that will be included in the student debt forgiveness package.
Some of these additions are intended to enhance more specific loan forgiveness programs, like the programs for borrowers who attended for-profit schools that were later determined fraudulent. These individuals will be able to file a borrower defense claim in hopes of having their full federal student loan balance forgiven.
Other components are intended to prevent interest from spiraling beyond control on borrowers' balances, enhance debt relief for borrowers who are permanently disabled, and make improvements to the Public Service Loan Forgiveness program.
President Biden has assured student loan borrowers that relief is coming soon, with checks going out by mid-November. Recipients should not expect direct payment - the loan forgiveness funds will be delivered to the loan service providers, and borrowers will see reductions in their loan balances.
For most consumers, a decrease in the amount owed to lenders will result in a credit score increase. This is due to a credit factor called credit utilization. Credit utilization is determined by how much debt you have compared to available credit. When your debt level goes down, your credit utilization improves.
For a few borrowers, however, student loan relief could have a negative impact. If the debt relief is enough to pay off your student loan balance in full, it could adversely affect two credit factors: credit mix and credit age. Read this blog post to understand how less debt could actually result in a lower score.
There's no need to wait around for debt relief to give your credit score a lift - there are a few things you can do now to improve your finances and build a brighter future:
It only takes one late payment to seriously damage your credit score. Although it may seem tedious or frustrating to continue making payments on student loan balances that are yet to be forgiven, it’s important to stay on top of your due dates.
As you look forward to reducing the amount you owe to creditors, the last thing you want to do is take on even more debt. Fortunately, there’s a way to build credit without opening a credit card, taking out a loan, or paying a security deposit.
StellarFi uses your regular monthly bills, like rent, utilities and streaming services, to build your credit. Just sign up and link your bills and bank account. We’ll report linked bill payments to all three major credit bureaus.
Best of all, there’s no minimum score to join, no interest charges, and no surprise fees.
The StellarFi blog is intended to serve as an informational resource. While StellarFi can help you build your credit, we do not provide financial, legal, or accounting advice. Please consult a trusted advisor for financial, legal, or accounting guidance as needed.