One of the big advantages of federal student loans is the income-driven repayment (IDR) plans. The most popular plans are Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE). What makes these plans special is that your monthly payment is based upon what you can afford to pay rather than what you owe. As a result, most student loan borrowers are able to qualify for lower payments.
Will signing up for IBR, PAYE or REPAYE hurt my credit score?
Many consumers already know that enrolling in a payment plan to settle debt can hurt your credit score. This usually happens when a lender reports to the credit agencies that the borrower is “paying partial payment agreement” or that the debt “settled.” These terms can be red flags for future creditors.
Signing up for an income-driven plan is different. Even though some of the IDR plans require a “partial financial hardship“, there is no hardship or partial payment designation on your credit report. In fact, the “partial financial hardship” required for some IDR plans simply means that signing up for the plan would save you money over the standard repayment plan.
Because there is not a negative designation associated with signing up for IBR, PAYE, and REPAYE; there is no harm to your credit score.
Will signing up for an income based repayment plan help my credit score?
Signing up for IBR, PAYE, or REPAYE is a powerful option because it can free up money each month and get you started on the path towards student loan forgiveness. Unfortunately, the direct impact on your credit score is minimal.
This is because your monthly payment is altered. Your credit history remains the same. Signing up for an income-driven repayment plan will not erase past mistakes.
However, signing up for an income-driven repayment plan can have a couple of indirect benefits to your credit overall.
How can income-driven repayment help my credit?
For those looking to build good credit to buy a house or qualify for lower interest rates in the future, signing up for IBR, PAYE, or REPAYE can be very helpful in two ways.
- IDR plans help your debt-to-income ratio – Even though the direct impact on your credit score may be minimal, an income-driven repayment plan can dramatically improve your debt-to-income ratio (DTI). Your DTI compares your monthly bills as reported on your credit report to your monthly income. The more income you have compared to your debt, the better your odds of getting an approval are. By reducing your monthly obligation on your credit report, lenders will see that you are in a better position to afford a mortgage or car payment.
- IDR plans help avoid missed payments – Repaying student loans on the standard repayment plan can be very difficult for many borrowers. If you are barely getting by on your current student loan plan, you could be one illness away from a missed or late payment. Signing up for income-based repayment can allow a borrower to start saving an emergency fund to ensure that there are no payment issues in the future. Put simply, lower payments mean more flexibility and financial stability. A missed or late payment can have a devastating impact on your credit score. Finding a way to prevent this from happening is a major win.
Some borrower also choose to consolidate their federal student loans as they begin repayment. Consolidation of student loans is another avenue that can potentially help credit scores.
Signing up for Income-Based Repayment, Pay As You Earn or Revised Pay As You Earn may not directly help your credit score. However, the indirect benefits are large, and going the income-driven repayment route can have a positive impact on your ability to get credit.