Why Student Loan Forgiveness May Be a Mixed Blessing

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This post comes from Gerri Detweiler at partner site Credit.com.

Last month, we heard from Matt, a reader who has been approved for student loan forgiveness but fears accepting it would damage the good credit he has worked hard to attain. He had tried to get answers, but felt frustrated that he couldn’t seem to find out exactly how student loan forgiveness would be reported to the credit bureaus.

Here’s what he said:

I have just received my letter saying I am authorized for a Total & Permanently Disabled student loan discharge. I have 60 days to return the letter to decide. I spent time researching after I first sent the request, and it seems many people with excellent credit scores are feeling a huge hit by getting their student loan forgiven. Is this true? Apparently there’s going to be left a lot of derogatory remarks on your loans and how they were paid off. I’m not sure what the exact remarks or “status” of the loans become once handed off to the discharge people, but it’s been enough to hurt a few people I’ve been in contact with.

Because Nelnet is now handling the accounts, I wanted to check with you to see exactly what would be reported to the credit bureaus. Can you help?

Once we began researching the question, we discovered that student loan forgiveness can be reported differently on consumers’ credit reports.

First, we heard from Rod Griffin, director of public relations for Experian. He told us by email:

The final reporting really depends on the status of the account when the consumer applies for Total and Permanent Disability. The account will be updated to show as paid in full by the data furnisher and the final status will show paid — and whatever payment history was reported up to that point. For example, if the loan was current — no missed or delinquent payments — then they would report the loan as paid in full as agreed. If the loan was in default and reported as a collection account, then once the TPD is approved, the furnisher would report this as a paid in full collection account.

Griffin said this is standard reporting procedure, not just Experian’s policy.

The Consumer Data Industry Association, which developed the Metro 2 guidelines that creditors use when reporting information to credit reporting agencies, said it may depend on how the lender reports the forgiveness. Norm Magnuson, vice president of public affairs, said in an email that “some lenders report the data in such a way that it results in an adverse entry. Others report it so that it doesn’t.” He added that guidelines were being updated and would be available soon.

And so we went to Matt’s student loan servicer Nelnet. Following is Nelnet’s response:

Every creditor is bound by the Fair Credit Reporting Act (FCRA) to report accurate and fair information. That information is then used by the credit reporting agencies to determine an individual’s credit score. Information in conjunction with a Total and Permanent Disability (TPD) discharge process is no different.

Here’s how Nelnet reports when servicing a TPD loan account. Both student loan lenders and servicers must record every loan on an individual’s credit bureau report. When a borrower accepts a TPD discharge, the lender or servicer will update the individual loan on that report based on the loan’s standing at the time the discharge is accepted. This update is made using one of two codes: one indicates that the loan was in default, and the other indicates that the loan was in good standing. Although we cannot speak as to how each creditor interprets and applies these codes, it is safe to say that having a loan in good standing is better than having a loan in default. Typically, loan forgiveness in itself isn’t something that would have a negative impact on a person’s credit score.

Based on the key players’ responses, student-loan forgiveness can impact your credit differently, depending on the servicer and the status of your loans before you enter into a forgiveness program. If you want to see how your student loans are impacting your credit score, you can check your free credit report summary on Credit.com.

One more thing that consumers who are considering applying for student-loan forgiveness should note: The loan forgiveness comes with a tax bill for the amount forgiven. Matt said he is more than happy to pay that in exchange for the loan forgiveness.

While we wish there were a one-size-fits-all answer; there isn’t. There are several companies that service student loans, and how student loan forgiveness after a disability discharge will be reported for all of them isn’t crystal clear. But Matt was wise to look at the possible consequences that come with the debt relief. As of this writing, he is still unsure about moving forward and risking possible credit damage.

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