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By Martha C. White
May 22, 2020
Kiersten Essenpreis for Money

Millions of student loan borrowers have been left worrying about the state of their credit reports after a company that manages repayment botched a program to help borrowers during the pandemic, according to a class-action lawsuit filed on Wednesday.

In the lawsuit, plaintiffs said that student loan servicing company Nelnet Corporation and its subsidiary Great Lakes Education Loan Services Inc. illegally damaged borrowers’ credit files that were supposed to be protected under coronavirus relief legislation. Other defendants included credit reporting agencies Equifax, TransUnion and Experian, as well as their subsidiary VantageScore Solutions, LLC.

The CARES Act stipulated most federal student loan borrowers would be eligible to have their monthly payments and interest charges temporarily waived. Great Lakes, which services the student loans of roughly 8 million borrowers, was supposed to count borrowers’ payments as up-to-date and on-time during this time period. Instead, the suit alleges that the servicer “mishandled the implementation of this relief” by classifying these borrowers’ accounts as “deferred,” a status with negative credit implications. Some people reported seeing their scores drop by 50 points or more — a significant amount.

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The problems didn’t end there: Plaintiffs said the three credit bureaus and VantageScore disseminated and sold this inaccurate credit information to third parties. These actions, they said, damaged their credit reports, in some cases prohibiting them from being able to obtain mortgages or refinance their homes.

“During a national pandemic, these companies illegally damaged the credit of millions of people,” says Seth Frotman, executive director of advocacy group the Student Borrower Protection Center.

Last week, VantageScore announced it would change its algorithm so that people using COVID-19 forbearance or deferment programs wouldn’t see their credit scores drop as a result. Great Lakes is supposed to be fixing what was characterized as a “coding error,” registering deferred payments as on-time payments and sending that information to the credit bureaus, but Mike Pierce, policy director at the SBPC, told Politico the damage has already been done.

“There are no guarantees when millions are newly looking for work that their job prospects or their housing prospects aren’t going to be held back by the fact that, for millions, their credit reports say they’re less responsible,” he says. Some state regulators also are looking into why borrowers were unfairly penalized for using a program that was supposed to provide them with financial relief.

If you’ve been impacted by this — or any other reporting error that is weighing on your credit file — experts say there are a few steps you should take.

Trust but verify, as they say. Even if you’ve been assured that the company will correct its mistake, you should watch to make sure they do so. Access a free credit report from annualcreditreport.com from each of the three bureaus once a year so you can keep track of and preserve a record of your credit history. Actually, experts say this is a good idea to do on general principle, in order to preserve an accurate record of your current credit information.

Understand your score. It can be helpful to know why and how something like an inaccurately categorized deferral can hurt your credit. Your credit score is made up of five components: Payment history, amount owed (a.k.a. credit utilization ratio), the length of your credit history, credit mix and new credit. Of these, payment history is the largest, making up 35% of your total score — which is why even a single negative item like a late payment or deferral can have enough of an impact to lower your score.

File a dispute. The Fair Credit Reporting Act requires credit bureaus to maintain accurate borrower data, so if you discover an inaccurate entry on your credit file, you should file a dispute. You will need to file separately with each of the three bureaus: Experian, Equifax and TransUnion separately. Explain why you’re disputing the negative activity. (Keep in mind, negative but accurate information can’t be removed — you’re stuck with it for seven years for most actions, and up to 10 years for bankruptcies.) There’s no charge to file a dispute — so don’t get tricked into signing up for a paid credit monitoring service. Ask each of the three bureaus to send notices of corrections to any organization or company that pulled your credit within the past six months.

If you want to use snail mail, the FTC has a sample dispute letter you can fill out and print, along with a list of tips. “Enclose a copy of your report with the items in question circled. Send your letter by certified mail, ‘return receipt requested,’ so you can document what the credit reporting company received. Keep copies of your dispute letter and enclosures,” the agency advises.

More from Money:

How Many Credit Cards Is Too Many?

Everything You Need to Know About Reverse Mortgages

The New Graduate’s Guide to Money in the Age of Coronavirus

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