Why Many Blindsided Student Loans Borrowers Saw Their Credit Scores Drop

A class-action lawsuit filed in May is alleging that a company’s mistake put the credit of nearly 5 million student-loan borrowers at risk in the middle of a pandemic. Some said their score plummeted by 100 points.

Here’s what happened to them — and how to protect yourself in the future.

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.

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.