How a change in your student loan servicer could impact your credit score

Earlier this year, some federal student loan servicers — like Navient, the Pennsylvania Higher Education Assistance Agency (often referred to as FedLoan) and Granite State Management & Resources — announced they would not renew their contracts with the U.S. Department of Education when they expire on Dec. 31, 2021.

The expired contracts mean that nearly 10 million borrowers will have their student loan accounts moved to another servicer. In other words, affected borrowers will need to start sending payments to a new servicer when the federal pause on student loan payments ends after Jan. 31, 2022.

Individuals being affected — who should have already been notified of the change — will need to be extra vigilant when making their first student loan payment since the start of the pandemic. They'll need to make sure they know who their new loan servicer is and where to send their payments, as well as confirming that their new loan servicer has their updated contact and mailing information (especially if the borrower moved during the pandemic). It's also important for borrowers to know the due date for their monthly payments.

Missing important information from their new loan servicer could result in an accidental missed payment, which could impact a borrower's credit score. But that's not all. There are other ways that this switch to a new servicer may impact a borrower's credit report.

"Borrowers may see their new servicer's name listed on their credit report," says Barry Coleman, the vice president of counseling and education programs at the National Foundation for Credit Counseling. "Their credit report could also list their previous servicer with a zero balance."

Listing a borrower's old servicer with a zero balance effectively closes that account on your credit report. Typically, when an account on your credit report is shown as closed your credit score tends to see a small drop. According to Coleman, this is because of a reduction in the average length of your credit history since the older student loan account is now closed.

The switch shouldn't affect how much you owe, and information about your new loan servicer's account will be added to your credit file shortly. Also, changes to your credit score as a result of this servicer switch may ultimately depend on the rest of your credit file. For example, you may see a bigger dip in your credit score if you apply for a new line of credit around the same time that your old loan servicer's account closes.

"Credit files are influenced by a number of factors," Coleman explains. "This includes the payment history of all accounts, the amount of credit available compared to credit limits, the types of credit accounts and the number of new credit inquiries and accounts. So, it's not just the student loans." 

The switch should not have any long-term negative affects to a consumer's credit report, says Coleman. However, the news still leaves some borrowers, like Lauren Holter, a writer and editor who tweeted a snippet from an email she received from her servicer FedLoan, feeling a bit uneasy.

In her tweet, Holter highlighted a line from the email that read, "once your loans have been fully transferred, you may see some changes on your credit report."

"It does concern me that something completely out of my control — like the government switching service providers for my federal student loans — could impact my credit score," she tells Select. "We already know that paying off your student loans can cause a drop in your credit score, so this is just another example of how the credit report system works against people doing what they're supposed to do."

The communication Holter received from FedLoan sounds as though her credit score could be impacted, but the executive director of the Student Loan Servicing Alliance, a trade association responsible for handling these loan transfers, reached out to Select after this story was published to state that the Department of Education has given servicers guidance on how to make the updates so it doesn't impact credit scores. He further explained that federal loan account transfers will only result in a servicer name change on borrowers' credit reports not a closed account.

While Holter lives abroad and likely won't need to use her credit report in the coming months, for most Americans in the U.S., their credit score has often been hailed as one of the most important indicators of financial health.

The number — which typically ranges from 300 to 850 if you're looking at the FICO score model — is a measure of a consumer's creditworthiness. It tells lenders how likely it is that a potential borrower will repay the loan or line of credit they're applying for.

Applicants with "good" or "excellent" credit scores (scores ranging from 671 to 799 and 800 to 850, respectively) can qualify for lower interest rates on mortgages, car loans, personal loans, credit cards and more. And they may also qualify for longer repayment terms or higher funding amounts.

On the other hand, applicants with "fair" or "poor" credit scores (ranging from 670 to 580 and 579 to 300, respectively) generally qualify for less favorable terms on the money they borrow. This could mean higher interest rates, smaller funding amounts and shorter repayment terms (which would, in turn, result in a higher monthly payment).

Some borrowers may see a decrease in their credit score — which could be a slight dip or a more significant double digit change — depending on what else is going on in a borrower's credit file. Such changes could be enough to bump some borrowers into a different credit score range, which (depending on the borrower and their circumstances) could make it more difficult for them to be approved for favorable terms when borrowing money.

"Like always, this will have the greatest impact on people who are already struggling financially," Holter says. "Many people have not recovered from the income they lost during the pandemic, and a potential hit to their credit score because of a change in governmental contracts is maddening."   

Your credit score is always changing so the good news is that any dips you experience are only temporary — by taking a few simple steps, you can actually see your credit score slowly improve over time.

First, be sure to make all your loan and other debt payments on time each month. This is the most important thing you can do to help raise your score since FICO and VantageScore, which are two of the main credit card scoring models, both view your payment history as the most influential factor when determining your credit score. 

You may also want to pay attention to your credit utilization rate, which is your total credit card balance divided by your total available credit. Your CUR makes up about 30% of your credit score. So if you have a credit limit of $20,000 and you have a $10,000 balance, your utilization is 50%. Experts typically recommend keeping your total credit utilization below 30%, and below 10% is even better. Consistently making on-time payments can help you lower your balance and lower your credit utilization rate over time.

And if you're already responsible for making utility and cell phone payments on time, you might be able to use *Experian Boost™ to increase your FICO® Score. It's a free and easy way for consumers to improve their credit scores. You'd just need to connect your bank account(s) to Experian Boost so it can identify your utility, telecom and streaming service payment history. Once you verify the data and confirm you want it added to your Experian credit file, you'll get an updated FICO® Score.

Federal student loan borrowers are already facing a bit of a stressful time as they gear up to start making payments again after Jan. 31, 2022. And those affected by the switch in student loan servicers will need to be extra vigilant when it comes to understanding who their new servicer is and where they should send their payments.

Affected borrowers may notice a dip in their credit scores, depending on what else is going on in their credit file. And while it may be a bit unnerving to some borrowers, they should continue to practice good credit habits by making payments on time, keeping their credit balances low and not opening too many new accounts at the same time.

Editor's note: This article has been updated with additional information provided to Select after the original story was published.

*Results may vary. Some may not see improved scores or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost.