Credit Scores of More Than 9 Million Student Loan Borrowers Will Likely Drop In First Quarter

As missed payments are influencing credit scores for the first time in five years, more than 9 million federal student loan borrowers are expected to see a significant decline in their credit standing over the first quarter.

New research from the Federal Reserve Bank of New York found that during the COVID-19 pandemic, student loan balance growth slowed, and delinquency rates fell drastically as most student loan borrowers were put into forbearance.

However, with many of the pandemic-era programs now ended, the New York Fed expects that borrowers will not repay at the same rate as before COVID-19. The bank estimates 9.7 million borrowers are holding more than $250 billion in delinquent student loan debt.

Delinquent debt will harm credit scores; the New York Fed predicts that the credit scores of more than 9 million borrowers will fall as much as 171 points. These hits will remain on borrowers’ credit reports for seven years.

Why Will So Many Borrowers Fall Into Delinquency?

At the beginning of the COVID-19 pandemic, all federal student loan payments were paused, and interest did not accrue on borrowers’ balances. This lasted until September 2023, when payments started again.

However, the Department of Education provided borrowers with a year-long on-ramp period during which missed payments would not affect credit scores. If borrowers did not start paying in October, they would likely have seen a hit to their credit in February.

That means four cohorts of college graduates are facing repayment for the first time, and recent graduates are more likely to miss a payment or default on their loans.

A court battle against several income-driven repayment plans could also influence the number of delinquent borrowers. Due to the lawsuit, applications for all IDR plans were suspended and then reopened this week. As a result, many borrowers were unable to enroll in an IDR, which would make monthly payments more affordable.