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Takeaways from the Key Takeaways
- In the first quarter, more than 9 million borrowers of student loans will likely see their credit score significantly deteriorate.
- During the COVID-19 pandemic, payments were paused, and until February 2025, missed payments didn't harm borrowers' credit scores.
- As four cohorts of recent graduates enter repayment for the very first time, and as court battles impact income based repayment plans, it is expected that delinquent student loans and defaults will rise more than they did in pre-pandemic days.
More than 9 million federal loan borrowers can expect to see a significant drop in their credit scores in the first three months of the year, as missed payments will now affect credit scores for first time in five.
New research by the Federal Reserve Bank of New York has found that during COVID-19, the growth of student loan balances slowed and delinquency rate fell dramatically, as most student loan borrowers went into forbearance.
The New York Fed believes that with the end of many programs from the pandemic period, borrowers won’t be able repay as much as they did prior to COVID-19. The bank estimates that more than 250 billion dollars in delinquent loan debt is held by 9.7 millions borrowers.
The New York Fed predicts a 171-point drop in credit scores for more than 9,000,000 borrowers. These hits will remain on borrowers' credit reports for seven years.
Why Do So Many Borrowers Become Delinquent?
At the start of the COVID-19 pandemic all federal student loans were paused and interest was not accrued on borrowers’ accounts. This lasted until September 20, 2023, when the payments began again.
The Department of Education gave borrowers a yearlong period of on-ramping during which missed payments wouldn’t affect credit scores. If borrowers had not started paying in October, their credit scores would have been affected in February.
Four cohorts of graduates will be facing repayment for the very first time. Recent graduates are also more likely to default or miss a payment.
A court battle over several income-driven repayment programs could also affect the number of delinquent lenders. The lawsuit led to the suspension and reopening of applications for all IDR programs. Many borrowers were therefore unable to enroll into an IDR that would have made monthly payments more affordable.
