Millions of Americans may see significant changes to credit reporting in the coming months if they have unpaid medical bills or student loans. But the reporting changes will be drastically different between the two debt groups.
Earlier this week, the Consumer Financial Protection Bureau — a federal financial watchdog agency — finalized a rule to remove at least $49 billion in unpaid medical bills from consumer credit reports. The changes may benefit 15 million Americans. At the same time, however, millions of borrowers who remain in default on their federal student loans will be hit with negative credit reporting in the coming months, as federal protections that have been in place for nearly five years are expiring.
Here’s what borrowers should know about these significant credit reporting changes.
New Rule Will Remove Credit Reporting For Unpaid Medical Bills
The new CFPB rule on medical debt will have sweeping impacts for people.
“The CFPB’s action will ban the inclusion of medical bills on credit reports used by lenders and prohibit lenders from using medical information in their lending decisions,” said the agency in a statement on Tuesday. “The rule will increase privacy protections and prevent debt collectors from using the credit reporting system to coerce people to pay bills they don’t owe.” The CFPB noted that medical debt provides “little predictive value” to prospective lenders, while ordinary Americans often suffer from inaccurate billing or debts that were incurred for medical bills that should have been covered by insurance.
“People who get sick shouldn’t have their financial future upended,” said CFPB Director Rohit Chopra. “The CFPB’s final rule will close a special carveout that has allowed debt collectors to abuse the credit reporting system to coerce people into paying medical bills they may not even owe.”
At least $49 billion in unpaid medical bills is expected to be removed from the credit reports of at least 15 million Americans under the new rule. This may provide a boost to credit scores, putting people in better positions to take out a mortgage or a car loan.
“The CFPB expects the rule will lead to the approval of approximately 22,000 additional, affordable mortgages every year and that Americans with medical debt on their credit reports could see their credit scores rise by an average of 20 points,” said the agency.
The new rule is expected to go into effect 60 days after its publication in the Federal Register. It is not yet clear whether the incoming Trump administration will proceed in implementing the rule; Trump transition officials and Republican lawmakers in Congress have been highly critical of the CFPB, citing it as an example of over-regulation that stifles business opportunity. However, halting the credit reporting of unpaid medical bills may prove to be popular with many Americans.
Negative Credit Reporting For Defaulted Federal Student Loans Set To Resume
Meanwhile, credit reporting for delinquent and defaulted federal student loans is moving in the opposite direction as medical debt.
Since March 2020, borrowers who were behind on their federal student loan payments or were in default have been shielded from credit reporting consequences. The CARES Act, which Congress enacted in response to the Covid-19 pandemic, paused repayment for millions of borrowers, preventing them from going into default. The legislation also shielded borrowers from default-related collections, which can include wage garnishment and tax refund seizures. The protections were originally supposed to last for only six months, but were extended several times by President Trump in his first term, and subsequently President Biden.
When the CARES Act protections finally ended in the spring of 2023, the Biden administration created the “on-ramp” program, which extended protections for delinquent federal student loan borrowers for another year. The administration also implemented the “Fresh Start” program, which ended negative credit reporting for defaulted federal student loan borrowers, extended the collections moratorium, and provided borrowers with a new pathway to get out of default and back into good standing again.
Those protections officially ended last fall. The Biden administration then authorized one final extension of the default protections and negative credit reporting moratorium for defaulted borrowers through January 2025.
At this point, there is no indication of any further extensions of the protections against negative credit reporting associated with delinquent or defaulted federal student loans. And the incoming Trump administration has not signaled any intent to provide further relief. As a result, borrowers who have started falling behind on their federal student loan payments or remain in default should expect to start experiencing negative credit reporting in the coming months. Nearly seven million student loan borrowers may be in default, according to the Education Department.
Borrowers can be reported late on their credit reports in as little as 30 days after missing a student loan payment, although most student loan servicers will report the borrower as delinquent after being past due for 60 or 90 days. Federal student loans go into default after the borrower has been past due for 270 days.
Although Fresh Start is over, defaulted federal student loan borrowers may still have options to get out of default, such as through rehabilitation or Direct loan consolidation. This can allow borrowers to access affordable payment options and possibly get on track for eventual student loan forgiveness.
New Bill Would Target Organizations That Claim To Repair Negative Credit Reporting
On Friday, Rep. Sarah McBride (D-DE) and Rep. Young Kim (R-CA) introduced the bipartisan Ending Scam Credit Repair Act (ESCRA). The bill would crack down on fraudulent practices in the credit repair industry by prohibiting credit reporting organizations from billing consumers until at least six months after they have been successful in improving credit report scores. The bill also would also increase penalties for violations.
“For too long the credit repair industry has been scamming Delawareans with low credit scores by promising easy credit fixes,” said Congresswoman McBride in a statement on Friday. “These CROs exploit legal loopholes to target cash-strapped Delawareans by charging large upfront fees based on false hopes of debt reduction. Our bipartisan bill eliminates those loopholes that have allowed predatory practices to flourish by banning upfront fees, improving transparency, and enhancing consumer protections.”
“Fraudulent credit repair organizations, or CROs, should not get away with scamming hardworking Americans seeking to improve their scores and unlock their American dream,” said Congresswoman Kim, noting that the proposed legislation would protect consumers who are seeking assistance in repairing negative credit reporting.
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