Suspended Payments Will Count Toward Public Service Loan Forgiveness (PSLF) and Loan Rehabilitation

Public Service Loan Forgiveness (PSLF) is a federal program that many borrowers are relying on to have their student loan balances forgiven. Under this program, borrowers with direct loans who work in the public sector and make 120 qualifying monthly payments will have their loans forgiven, tax-free.

According to the CARES Act, suspended payments will be treated as regular payments toward Public Service Loan Forgiveness. This is an important measure that ensures borrowers who have been working toward these programs will stay on track toward forgiveness.

The same rule applies to individuals currently participating in student loan rehabilitation, during which borrowers with defaulted student loans are required to make nine out of 10 consecutive monthly payments to pull their loans out of default. In the same vein as the PSLF provision, suspended payments will be treated as regular payments during the rehabilitation period. The U.S. Department of Education will treat the six-month payment suspension as if the borrower continued making regular payments toward rehabilitation.

The Forbearance Period Shouldn’t Negatively Affect Your Credit Score

Under the CARES Act, the federal student loan suspension period should not have a negative effect on consumer credit scores. According to the law, student loan servicers should not report nonpayment during forbearance as missed payments. On a credit report, it should appear as though borrowers are making on-time monthly payments, which can only strengthen a credit score, not hurt it.

However, there have been reports of consumer credit scores taking massive hits during the forbearance period. According to some consumers, their credit scores have dropped as much as 100 points because their servicers are incorrectly reporting the nonpayment to credit bureaus during the forbearance period. It’s unclear how many borrowers have experienced this, but Great Lakes, one federal student loan servicer, addressed the issue, stating it didn’t believe its credit reporting was negatively affecting credit scores.

As of April 20, consumers can now check their credit reports for free every week through April 2021 via AnnualCreditReport.com. If you check your credit report and find negative information about your federal student loans during the forbearance period (March 13 through September 30), such as missed payments, call your servicer and work together to resolve the error. If that doesn’t work, you can file a formal dispute with the major credit bureaus (Experian, Equifax and TransUnion) to have the negative marks removed from your credit report.

If You Need A Lower Payment Long-Term, Consider Enrolling In An Income-Driven Repayment Plan

If you are worried about experiencing financial hardship for more than the six months of relief currently offered by the government, there are still steps you can take to manage your student loan payments.

Borrowers can change their payment plans at any time simply by calling their servicers. Now or soon might be a good time for many to consider enrolling in an income-driven repayment plan.

Income-driven repayment plans cap monthly payments at a percentage of a borrower’s discretionary income (the cap depends on which plan you’re enrolled in, but will be between 10% and 20%). Individuals with no income will qualify for a $0 payment.

There are careful considerations borrowers should keep in mind before choosing an income-driven repayment plan. For example, loan forgiveness is promised after 20 or 25 years of payments, but you’ll have to pay taxes on any balance forgiven (if you can’t prove insolvency). Another caveat: Some loans might not qualify, such as parent PLUS loans or loans from the Federal Family Education Loan Program, which must be consolidated into a direct consolidation loan to be eligible.

There are four income-driven repayment plans available, and each have their own features, benefits and drawbacks. To make choosing easier, when logging into your servicer’s website, check the box on the site that says “I want the income-driven repayment plan with the lowest monthly payment.” The system will automatically assign you the plan with the lowest monthly payment based on your income.