Do you have student loan debt? Are you looking for credit repair near me for loan repayment plans? Keep reading to find out more!
Among the most complex debtors to control include the student loan debt, which is highly burdensome to young career individuals. The fact that there are income-based repayment plans available is a savior to many people who need help to afford to make monthly repayments based on their earnings. As such, the income-based repayment plans may make the financial burden lighter for the majority of the borrowers; however, a lot of them have questions about the effect that it has on credit scores.
We’ll explain income-driven repayment plans and their impact on credit in this step-by-step guide. In addition, we will discuss the possible effects of income-based plans on your credit score and give you some useful tips on how to keep your credit score intact.
An Overview of the Income-Based Repayment Plan.
Income-driven repayment plans are federal student loan options that help mitigate the effect of loans on credit ratings by allowing borrowers who have fluctuating finances to repay based on their current ability. These plans include:
- Income-Based Repayment (IBR): IBR puts limits on how much one pays each month, taking into account factors such as family size, etc.
- Pay As You Earn (PAYE): Like IBR, PAYE is designed for a borrower who took his first federal loan after October 1, 2008, and received a disbursement on/after October 1, 2012.
- Revised Pay As You Earn (REPAYE): Thus, REPAYE is easily available for more borrowers. In that line, it now covers individuals who borrow money directly, even if they did not borrow at the same time. It guarantees that the payment amounts are at most 10% of discretionary income per month.
- Income-Contingent Repayment (ICR): ICR takes into consideration your income and the number of members in your family for purposes of monthly bills.
Credit Scores and Income-Driven Repayment
Your credit score is not directly affected by income-driven repayment plans. However, several variables may result in changes in your score. Participating in these plans does not inherently harm your credit, but it is important to consider these factors when evaluating your creditworthiness:
On-Time Payments
Your credit score depends entirely on making timely payments. Such income-driven repayment plans will ensure that you are able to make payments for affordable and timely payments that will have a positive impact on your credit file.
Loan Forgiveness and Repayment Period
Although income-driven plans may extend the repayment period to 20-25 years, that will still reflect as a long-term debt on a credit report. Such a period might influence your creditworthiness when you attempt to access another form of lending, e.g., mortgage and auto loan.
Interest Accrual
However, depending on your repayment plan, you will end up paying less than the interest accumulated on your loans. Moreover, if there is unpaid interest in the future, it may capitalize and be added to your loan balance, which finally increases the total loan amount you will be required to pay.
Credit Reporting
Most federal student loan servicers report your account to the credit bureaus; thus, it becomes your payment history and is reflected in your credit report. Make timely and consistent payments, as this will greatly help in improving your credit score.
Temporary Forbearance
A temporary forbearance or deferment is one of the options that you have in case you encounter some financial problems. Such cases do not lead to bad credit. Nevertheless, it would help if you made it a point to engage your loan servicer so that they can schedule such intervals.
Loan Forgiveness and Its Impact
One of the positive things about an income-driven repayment plan is that you can have your loan forgiven in case you make 20 – 25 years of qualifying payments. Although this may help the borrowers financially, it could affect your credit score.
The IRS treats the loan forgiveness under these plans as taxable income, and this means that the borrower should pay taxes for the amount forgiven. The financial strain may include significant tax liabilities that will have a negative effect on a person’s credit. Nevertheless, it is not the income-based repayment plan that impacts the score but the unpaid taxes. The total amount forgiven and the tax situation differ widely.
Conclusion
Some income-based repayment plans allow borrowers to pay on time and reduce the amount owed over the long run. However, they could adversely affect borrowers’ creditworthiness as a result of lengthy repayment periods and possible income tax liabilities upon loan forgiveness. Watch out for your finances if you want to maintain or upgrade your credit score when paying student loans. In case you do need professional assistance, opt for local credit repair services to make everything less complicated with credit and personal money matters.
