Three Ways People With Student Loan Debt Can Protect Their Credit Score

Federal Student Aid (FSA) will resume collections on delinquent student loans starting May 5, the Department of Education announced Monday. Even before the news, millions of borrowers had already seen their credit scores fall in recent months, and lenders 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 and how to prepare for them. Now let’s dive into how borrowers suffering from debt defaults can navigate their financial future.

What does the end of the pause mean for your finances?

“Many people have felt like they were going through some sort of personal financial downturn for years,” says Lauren Bringle, an accredited financial advisor at lending platform Self Financial . And if you’ve had credit card debt, you know those higher interest rates could cause your debt to increase significantly.

Keep in mind that the cost of many monthly expenses increases—groceries, gas, eggs—all while wages remain the same. “Now add to that that student loan payments have resumed, and for some, that means hundreds of dollars in extra expenses each month,” Bringle notes. Especially after a five-year pause in payments that began during the COVID-19 pandemic, many borrowers are having to make significant adjustments and re-evaluations of their budgets. Despite all the additional costs, millions of Americans found themselves unaffordable.

Strategies to Protect and Repair Your Credit

Here’s what you can do to improve your credit score.

1. Free up money wherever you can.

If your income is limited and you simply don’t earn enough to cover your student loan payments, Bringle offers an income-based repayment plan for federal student loans. “The federal student loan landscape is changing quickly, but you may qualify for lower monthly payments (even as low as $0 a month in some cases) depending on your income,” Bringle advises. You can learn more and apply at Studentaid.gov here.

2. Prioritize your credit.

“Credit is an important part of your overall financial profile because it opens the door to achieving long-term financial goals, such as renting an apartment or getting a mortgage,” explains Bringle. Missed loan payments can have a significant impact on your credit, as payment history makes up 35% of your FICO credit score, making on-time payments critical.

If your credit has already suffered due to missed student loan payments, consider alternative recovery options. For example, something as small as implementing this payment schedule helps point your credit score in the right direction.

Additionally, Bringle recommends organizations like Operation Hope , NFCC , and AFCPE , where credit counselors can analyze your income, expenses, debts, and overall financial picture to help you create a personalized budget and spending plan.

3. Continue to build positive financial habits.

Regardless of your financial situation, focus on developing positive short-term habits. Especially with student debt, this helps keep everything in check as much as possible.

• Stick to your budget. “When you’re setting your financial goals, make sure you have a really clear picture of your overall finances,” says Bringle. “Your budget plays an important role in improving your credit score because it helps you track your expenses and ensures you can pay your monthly payments on time and in full.” Here’s my guide to assessing and strategically trimming your budget.

• Make payments on time . Setting up automatic payments will help you avoid missing payment deadlines, which can negatively impact your score. “Depending on the terms of their student loans, borrowers typically have up to six months after graduation before they have to start making payments,” Bringle notes. “Be sure to check your credit and find out exactly when the first payment is due so you can plan ahead and pay on time, as payment history is an important part of building and maintaining healthy credit.” To find out exactly how much you should pay, visit Studentaid.gov.

• Hack the use of credit. Credit utilization is the second largest factor in 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 the lower the better. Using more than 30% of your available credit can affect your credit utilization, which can ultimately lower your score. For example, if your credit limit is $1,000, you should not put more than $300 on your credit card until the balance is paid off.

• Review your credit report regularly . Checking your report gives you a clear picture of your credit status and what may affect your score. You can review payment history, recent balances reported to the credit bureaus, accounts in your name, and identify negative items such as fees that need to be addressed. Free copies of your credit reports from Experian, Equifax and TransUnion are available at Annualcreditreport.com .

Looking to the future

Bringle stresses the importance of preparation: “Make sure your budget is set to support your payments, start setting aside payments from your monthly budget to develop a habit, and set up autopay if you can to reduce the likelihood of missing a payment.”

By taking proactive steps now, you can maximize the protection and restoration of your credit score before student loan payments resume.

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