Cascade failure
The problem began with the CARES Act, a sweeping piece of legislation designed to cushion the financial blow caused by the coronavirus.
Among other measures, the CARES Act hit pause on all federal student loans until Sept. 30, 2020. Payments and interest were automatically put on hold to help Americans keep more money in their pockets.
Congress knew these skipped payments would look bad on a credit report, potentially leading to a significant drop in consumers’ credit scores, so it ordered that they be recorded as $0 payments made on time.
However, due to an apparent coding error, major student loan servicer Great Lakes reported those payments as “deferred” instead.
At the time, “deferred” payments on a credit report were regarded negatively by VantageScore, one of two major companies that calculate credit scores. (The larger credit score provider, FICO, didn’t take deferrals into account.)
While Great Lakes acknowledged the mistake, it wrote in a May 14 press release that it doesn’t believe its reporting “has impacted actual consumer credit scores.”
Yet the resulting lawsuit said the blunder “resulted in immediately lower credit scores and jeopardized student loan borrowers’ access to credit at this crucial time and going forward.”
Social media lit up with complaints that people’s scores were dropping by 10, 50, even 100 points. With lenders getting pickier during the pandemic, drops that big could keep borrowers from getting decent interest rates — if they even get a loan at all.
“We’re working with credit reporting agencies ... to ensure the accuracy of the information we reported regarding COVID-19 forbearances,” Great Lakes wrote in its release.
Even though a fix may be on the way, the problem of mistakes on credit reports doesn’t begin and end with one company.
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How to protect your score
What happened to borrowers serviced by Great Lakes could have happened to anyone. Because the CARES Act deferment was automatic, people were put at risk even if they didn’t need or want the help in the first place.
Major and minor mistakes appear on credit reports more often than you might think. Thankfully, you can take some simple steps to protect yourself.
First, you’ll want to request a copy of your credit score and credit report. You can get them a few different ways.
Credit Sesame, which offers free credit scores, will also monitor your file and give you regular updates, so you’ll be informed if any mysterious “missed payments” show up later.
If you spot an error on your credit report, it’s an easy fix. All you have to do is report it to the respective credit bureau. The bureau will have 30 days to investigate, and if it’s deemed a mistake, that black mark will fall right off.
If your credit score is still too low after fixing the mistakes — right now, some lenders are insisting on a score of at least 700 or 680 to even get a big loan, like a mortgage — you can take more steps to improve it.
What if I have a private student loan?
Millions of borrowers may have feared for their credit scores, but at least they got to skip their student loan payments. People who signed up with a private lender may not be so lucky.
Plenty of companies, like Navient, Sallie Mae and SoFi, are offering assistance in one form or another during this difficult time, but it’ll be hard to find a long-term, no-interest solution.
The next best option to reduce your monthly payments may be refinancing, where you pay off your high-interest student loan by taking out a better one.
A number of online tools let you compare refinancing options for free so you can find the best rate and terms for you.
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