Millions of Americans are on the brink of a credit crisis as student loan delinquencies are now starting to appear on credit reports for the first time since the pandemic.

According to a recent analysis by the Federal Reserve Bank of New York, more than 9 million borrowers could see significant drops in their FICO® Scores in the coming months. This shift could have long-term consequences, affecting access to home and auto loans, credit card limits, and overall financial stability.

The Return of Student Loan Repayments

Since the COVID-19 pandemic began, federal student loan payments had been on hold, providing relief to millions of borrowers. However, student loan payments resumed at the end of 2023 when the Biden administration lifted the payment moratorium. While borrowers have been required to make payments for over a year now, they were temporarily shielded from credit consequences during an “onboarding” phase. This period prevented loan servicers from reporting missed or late payments to credit agencies, offering struggling borrowers a buffer.

That grace period officially ended in September 2024. Under federal regulations, servicers must wait 90 days before marking loans as delinquent, which means those delinquencies are now starting to appear on credit reports. The effects of these missed payments are beginning to ripple through the economy, causing concern among financial experts and policymakers.

How Do Student Loan Delinquencies Affect Credit Scores?

Credit scores are crucial in determining financial opportunities for individuals, influencing everything from mortgage approvals to interest rates on auto loans. According to the New York Fed’s report, borrowers who fall behind on student loans could see a significant decline in their credit scores. The impact can be especially severe for those with average or subprime credit:

• A borrower with an average credit score may experience a decline of more than 150 points if their student loans become delinquent.
• Subprime borrowers (those with FICO® Scores below 660) can see their scores drop by about 87 points.

A drop in your credit score can mean losing access to affordable credit options. It can be more difficult to buy a home, finance a car, or even secure rental housing. Additionally, lower credit scores can result in higher interest rates and lower credit limits on existing accounts.

The Student Loan Delinquency Problem

The New York Fed’s report estimates that more than 15% of all student loan borrowers are currently behind on their payments. This figure is slightly higher than pre-pandemic delinquency rates, suggesting many individuals are still struggling to making regular payments.

There are several factors contribute to these delinquency rates:

• Economic Uncertainty – Rising inflation and economic fluctuations have put additional financial pressure on households and made it harder to keep up with loan payments.
• Insufficient Income Growth – Many borrowers have not seen significant wages increases, so there might not be enough money budgeted for student loan payments.
• Not Utilizing Assistance Programs: Some borrowers may not be fully informed of their repayment options or difficulty accessing relief programs.
• Student Loan Scams – Because of the confusion around forbearance and resuming of student loan payment, scammers have seized on the opportunity to exploit student loan borrowers.

Measures to Help Student Loan Borrowers

There are steps borrowers can take to mitigate the impact student loan payments. These can include:

• Income-Driven Repayment Plans – These plans cap monthly payments at a percentage of the borrower’s discretionary income, so payments are more manageable.
• Loan Forgiveness Initiatives – Certain borrowers, such as those in public service, may qualify for loan forgiveness programs that reduce or eliminate their student loan debt.
• Temporary Forbearance and Deferment – For those facing extreme financial hardship, these options allow temporary pauses on student loan payments, but interest may still accrue during this time.

Broad Economic Consequences

The surge in student loan delinquencies can have broad economic implications beyond individual credit scores. With a large section of the population posed to have a decrease in their credit scores, the entire economy can be affected.

• Reduced Consumer Spending – Lower credit scores can limit access to credit cards and loans, reducing overall consumer spending.
• Housing Market Disruptions – Potential homebuyers may find it harder to secure mortgages or favorable loan terms, which can slow down home sales and impact the real estate market.
• Financial Institution Risk – A rise in delinquencies can increase the risk for banks and lenders. This can lead to tightened lending standards.

What Can Borrowers Do Now for Their Student Loans?

For those struggling with their student loan payments, they can take proactive steps can help soften the blow to their credit:

1. Contact Loan Servicers – Borrowers should communicate with their loan servicers as soon as possible to explore repayment options, such as income-driven repayment plans or temporary forbearance.
2. Monitor Credit Reports – Keeping an active eye on credit reports can help borrowers understand how delinquencies are affecting their credit scores and dispute any inaccuracies.
3. Seek Financial Coaching – Credit coaches can provide guidance on managing student loan debt and improving financial health.
4. Consider Refinancing or Consolidation – For those with multiple loans, refinancing or loan consolidation can provide a lower interest rate or extended repayment terms.
5. Use Credit-Building Tools – There are DIY credit-building tools student loan borrowers can use to help improve their credit score, including taking actions such as reporting their rent payment and utility payments to credit bureaus.

Bottom Line

As student loan delinquencies begin appearing on credit reports, millions of Americans face declining credit scores and financial challenges. While government programs and repayment options can help borrowers stay on track, many might still struggle to make payments. The long-term effects of this wave of delinquencies can, unfortunately, impact everything from homeownership to consumer spending.

For borrowers, taking action by researching repayment options, monitoring credit scores, and seeking financial coaching – can help. To actively monitor your credit report and FICO® Scores, sign up for MyScoreIQ credit monitoring services to stay on top of your financial health.