Nearly 10 million Americans face devastating credit score drops as student loan delinquencies hit record highs following the end of pandemic-era payment pauses.
Quick Takes
- 9.7 million federal student loan borrowers have fallen behind on repayments since the pandemic freeze ended in September 2023
- The Federal Reserve Bank of New York warns delinquencies will appear on credit reports in early 2025, causing significant credit score damage
- Borrowers with excellent credit could lose an average of 171 points, while subprime borrowers may see drops averaging 87 points
- Past-due federal student loans have reached a record-high 15.6%, totaling over $250 billion in delinquent debt
- Income-driven repayment applications have reopened as the Education Department faces workforce cuts and planned dissolution
Millions Face Credit Score Crisis as Student Loan Repayments Resume
The Federal Reserve Bank of New York has sounded the alarm on an impending credit crisis affecting almost 10 million Americans who have fallen behind on their student loan payments. After more than three years of pandemic-related payment pauses, the resumption of required payments in October 2023 has led to unprecedented delinquency rates. An estimated 9.7 million federal student loan borrowers are now behind on repayments, with past-due federal student loans reaching a historic high of 15.6%, representing over $250 billion in delinquent debt.
Following the end of the pandemic-era freeze that began in 2020, borrowers were given a one-year “on-ramp” period during which late payments were not reported to credit bureaus, though interest continued to accrue. This grace period has now ended, and the consequences are about to become severe. The delinquencies will appear on credit reports in early 2025, potentially devastating the financial futures of millions of Americans who had previously maintained strong credit ratings.
Credit Score Impact Varies by Borrower Type
The damage to borrowers’ credit scores will vary significantly depending on their current credit standing, with those having better credit facing the steepest drops. According to the Federal Reserve Bank of New York, “superprime” borrowers – those with excellent credit scores – could lose an average of 171 points, while subprime borrowers may see declines averaging 87 points. These reductions will affect borrowers’ ability to secure mortgages, auto loans, and credit cards, potentially at the exact moment many are entering their prime home-buying years.
“Given these estimates, we expect to see more than nine million student loan borrowers face substantial declines in credit standing over the first quarter of 2025.” – Federal Reserve Bank of New York
The impact on prime and superprime borrowers will extend beyond just lower credit scores. These individuals will face additional consequences such as reduced credit limits, higher interest rates on loans and credit cards, and greater difficulty qualifying for mortgages. The damage from these delinquencies will remain on credit reports for seven years, creating long-term financial obstacles for affected borrowers well into the 2030s.
Government Response and Repayment Options
As millions of borrowers struggle to resume payments, the Department of Education is simultaneously scaling back its own operations. The department is cutting nearly half of its workforce and has plans to dissolve altogether, transferring many responsibilities to state governments. This restructuring comes at a critical time when borrowers need maximum support to navigate repayment options and avoid credit damage.
“will face significant drops in credit score once delinquencies appear on credit reports in the first half of 2025.” – Federal Reserve Bank of New York
In response to the growing crisis, the Education Department has reopened online applications for several income-driven repayment plans. These programs can significantly reduce monthly payment obligations by calculating payments based on income and family size rather than loan balance. However, the Biden administration’s SAVE plan, which would have offered more generous terms, remains unavailable to new applicants. Borrowers seeking to avoid credit damage are encouraged to contact their loan servicers immediately to explore available options.
Sources:
- Almost 10 Million Student Loan Borrowers at Risk of Significant Credit Score Drops, Fed Warns
- 9 million student loan borrowers are about to see their credit scores drop
