9 million student loan borrowers are about to see their credit scores drop
More than 9 million Americans could see “substantial declines” in their FICO scores in the coming months as delinquent student loans begin showing up on credit reports for the first time since the pandemic, according to a new analysis by the Federal Reserve Bank of New York.
The report finds that over 15% of all student loan holders are likely now behind on debts, slightly more than before the pandemic. Those affected could face a tougher time getting access to home or auto loans or see their credit card limits lowered.
Borrowers have been required to make normal monthly payments on their student loans for well over a year, since the Biden administration ended the COVID-era pause on the program. But they temporarily benefited from a so-called “onboarding” phase, during which loan servicers were not allowed to report late or missed payments to credit agencies.
That grace period ended in September. Since servicers cannot report a loan as delinquent until it is 90 days past due, late student loan payments are only just now showing up on Americans’ credit scores.
For those who are behind, the impact on their creditworthiness could be significant. In its report, the New York Fed’s researchers found that a student loan delinquency can knock more than 150 points from the FICO score of someone with around average credit. For subprime borrowers — those with scores below 660 — it can subtract 87 points.
The Biden administration took several steps aimed at helping student borrowers get current on their loans as repayment resumed. Those included the Fresh Start program, which allowed people who had defaulted on their debts to get current without facing penalties. But only about 900,000 individuals took advantage of the offer, according to the Department of Education, leaving millions more lingering in default.
Recent confusion around the state of the student loan program may not be helping matters. For the past month, for instance, the administration had blocked access to income-driven repayment plans, which cap what borrowers owe each month at a percentage of their earnings, in response to a court ruling, leaving many with fewer options to manage their debts. Those applications finally reopened on Wednesday.
Learn more: How to pay off your student loans quickly
The Trump administration is also widely expected to restart involuntary collections on defaulted student loans sometime this year, though it’s unclear if they have a plan worked out for resuming that process, which can involve garnishing paychecks and government benefits like Social Security payments. The administration's recent announcement that the student loan program would be moved out of the Department of Education to the Small Business Administration has made things additionally murky.
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