Brace Yourself: Student Loan Impact on Credit Starts in January 2025

The Department of Education has recently issued critical guidance that every student loan borrower should understand. As we approach 2025, collection activities and negative credit reporting for student loans are set to resume, marking the end of the 12-month on-ramp period that began in October 2023. Here’s what you need to know about these upcoming changes and how to protect your credit.

What Happened to the 12-Month On-Ramp?

After the resumption of student loan payments in October 2023, borrowers were given a 12-month on-ramp period where no negative credit reporting or collection activities took place. This period, which concluded on September 30, 2024, offered a temporary reprieve to those who were behind on their payments. However, as of January 2025, borrowers will once again face the reality of missed payments affecting their credit.

“Both the on-ramp period and Fresh Start ended on Sept. 30, 2024. The latest guidelines from the Department of Education reaffirm that collection activity and negative credit reporting will resume, starting in 2025.”

The Fresh Start Program: A Missed Opportunity for Some

During this on-ramp period, borrowers who were in delinquency or default before the COVID-19 pandemic had the chance to benefit from the Fresh Start program. This program allowed borrowers to regain control of their loans and improve their credit scores. With the program now ended, those who didn’t take advantage may see the impact on their credit as early as January 2025.

Negative Credit Reporting Resumes in 2025

Historically, late or missed student loan payments could damage a borrower’s credit score within 90 days. Since March 2020, however, these late payments were not reported, offering relief during the pandemic. But this is set to change:

“That’s set to change in 2025. January marks the 90-day period for delinquency. So, borrowers who have failed to make a payment since payments have resumed are facing these negative credit reporting activities.”

This means that borrowers who are behind on their payments since October 2023 may start seeing the negative effects on their credit as early as January 2025.

Collection Activities to Resume in 2025

The return of collection activities will add pressure on borrowers. After 270 days of non-payment, borrowers could face wage garnishments, tax refund offsets, and more. The Department of Education confirmed that these actions will align with the usual 9-month period for student loan defaults, making late 2025 a critical time for those who have yet to catch up on their payments.

“The worst part of collection activity is that it can become a cycle. Since the offsets and garnishments typically don’t cover the interest and fees being added to the loan, borrowers cannot get out of collections unless they take action such as consolidation or rehabilitation.”

What Steps Should Borrowers Take Now?

If you’ve been unable to make payments since October 2023, it’s not too late to take action before credit reporting and collections begin:

• Enroll in a Repayment Plan: Reach out to your loan servicer or log in to StudentAid.gov to find an appropriate repayment plan.
• Explore Loan Rehabilitation or Consolidation: This could help you get out of default and resume a positive payment history.
• Stay Informed About Litigation: Some loan forgiveness and repayment plans are still under litigation, so stay updated on developments that could impact your repayment options.

Bottomline

As 2025 approaches, borrowers should be prepared for the resumption of negative credit reporting and collection activities on student loans. Proactive steps can help mitigate the impact, but time is of the essence. If you're looking to make a fresh start, whether in your finances or in a new home, let's connect.

Reference: Farrington, R. (2024, October 10). Student Loans May Impact Borrowers’ Credit As Early As January 2025. Forbes.