Reduced Student Loan Payment Concern

Here’s something to watch out for on credit reports: student loan payments.  About 43 million people have student loan debt, with industry estimates at around $1.4 trillion nationwide. Of that 43 million, over five million participate in one reduced payment plan or another on their loans.

That has allowed the borrowers to have their monthly payments lowered because of their incomes and family sizes.  The reduced amount they pay appears on their credit reports.  That amount, of course, varies depending on their income and family size.  Mortgage lenders, until April 2017, ignored the payment that showed on a credit report and instead calculated one percent of the total loan amount as the payment.  Fannie Mae changed that, but the calculation is about what the monthly payment would be were it not for a reduced payment plan, the monthly payment that shows on the credit report.  That makes for more people able to qualify for a mortgage.  However, that’s not what we are concerned with here.

So, for example, if a student loan was $40,000, one percent of that is $400, the expected, non-reduced payment that Fannie Mae mortgage lenders used before April 2017.  Now if the borrower had gotten the reduced payment and it was now $100, good for him or her.  But there’s a concern for employers and rental owners and managers.  You see, the reduced loan payment must be “recertified” every year and any income and family size changes reported.

Different programs calculate the payment reductions differently, and the ways they do it is enough to make you scratch your head.  Regardless, the payment amount is recalculated every year when the borrower “recertifies” the payment reduction.  Go to studentaid.gov for their explanation of the process.

Our concern is that the payment we see when we check an applicant’s credit could change markedly when he or she “recertifies” at the end of the year.  Thus, if you rent to someone and rely on say $100 as the monthly payment, if your new tenant has a new job that pays three or four times what his or her old job paid, that monthly payment could skyrocket in just a few months, making it difficult to pay the rent, especially after your new tenant goes out and buys a new Cadillac Escalade with a $850 a month payment to celebrate the new job.

The other issue is if the borrower neglects to “recertify.”  The payment then reverts to its original amount, probably the one percent of the loan amount.

Likewise for an employer, the new employee could end up unable to keep up rent payments and the car payment when he or she loses the reduced federal student loan payment thus getting evicted or having the car repossessed making getting to work problematic.

Sometimes a credit report will show a $0 monthly payment on a student loan.  Why, I don’t know, but the loan is not paid off.  A payoff would show in a different place.  The borrower has a reduced payment that isn’t recorded accurately on the credit report and requires the same precaution that any other amount would.

Just be aware that reduced student loan payments aren’t permanent and could change annually. You are safer recalculating the same way mortgage lenders have done.

By Robert L. Cain