A steep credit score drop could be on the horizon for millions of student loan borrowers. According to a Federal Reserve Bank of New York report, millions of borrowers had student loans in delinquency after a pandemic-era payment pause ended. Here’s what it means for student loan borrowers and how it could impact credit scores.
Student loan payment on-ramp
The delinquency in student loan debt looms with the end of the student loan on-ramp. This was a 12-month grace period during which student loan borrowers were to resume making payments after a three-year pause during the COVID-19 pandemic. Although borrowers were encouraged to continue making payments, missing one would not move them toward default or trigger collections.
Because student borrowers didn’t enter delinquency or default during the on-ramp, their credit scores improved significantly. Delinquent borrowers saw their scores increase by a median of 74 points between the fourth quarter of 2019 and the fourth quarter of 2020. Borrowers who defaulted in 2019 saw a median increase of 44 points.
The end of the on-ramp
The student loan payment on-ramp ended on September 30, 2024. This means student loans can become delinquent again, and borrowers can default. Another option is forbearance, which pauses payments, but interest continues accumulating.
The end of the on-ramp is expected to have sweeping implications for student loan borrowers. The New York Fed reports that the volume of past-due federal student loans quickly returned to pre-pandemic levels after payments resumed. This has led to a delinquency rate of 15.6%, with $250 billion of delinquent debt and 9.7 million delinquent borrowers.
Delinquencies begin to hit credit reports
While the on-ramp period ended on September 30, missed payments did not immediately lead to delinquencies. Payments over 90 days past due are considered delinquent, meaning it took some time for delinquencies to hit credit reports.
The New York Fed report said rolling delinquency windows would begin in the first quarter 2025. It predicted a significant uptick in student loan delinquencies during this time. However, it says estimating the size of the increase is difficult.
Some student loan borrowers will likely default eventually, though we haven’t yet reached that point. Loans will default when payments are 270 days late, which is about nine months’ time.
Credit score impacts
With the end of the on-ramp, the expectation is that we will see significant credit score impacts for delinquent student loan borrowers. The New York Fed says delinquency rates may surpass pre-pandemic levels.
However, it also states that delinquencies will not affect all student loan borrowers equally. It used data from 2016 to 2019 to estimate the credit score impacts of new delinquencies of 90 days or more.
It found that delinquencies will have the greatest impact on superprime borrowers, defined as those with credit scores of 760 or higher. These borrowers can expect a drop of 171 points due to new delinquencies. Borrowers with subprime credit scores (620 or lower) will see the least impact, with a projected 87-point drop. The average projected drop in credit scores for all borrowers is 146 points.
The report highlights the potential real-world impacts of these drops. For instance, they could result in reduced credit limits, higher interest rates on new loans, and lower credit access. The agency will continue to monitor delinquencies in the coming months.
