Millions of student loan borrowers in the U.S. are facing financial difficulties as delinquent payments will now impact their credit scores for the first time since the pandemic pause. With the end of the leniency period implemented by President Joe Biden, missed payments can now be reported to credit bureaus, increasing concerns among borrowers. This development comes at a time when many Americans are already dealing with rising household expenses and increasing debt burdens.
When federal student loan payments resumed in October 2023, some borrowers struggled to keep up, leading to a rise in delinquency rates. In previous reports, financial analysts had warned that a significant portion of borrowers might face credit score reductions once missed payments were reflected in their credit histories. Now, with the latest data indicating that nearly 9 million borrowers are behind on payments, those warnings have materialized. Credit reporting firm VantageScore estimates that some borrowers could experience declines as steep as 129 points in their credit scores.
How Will Credit Scores Be Affected?
VantageScore’s analysis of Department of Education data suggests that 2.3 million borrowers could see their scores drop below 600, placing them in the “subprime” category. Additionally, 32% of borrowers who are likely to be past due currently hold scores in “prime” or “super prime” ranges. A lower credit score could make it more challenging for affected individuals to secure loans and other financial opportunities in the future.
The broader economic impact of these credit score declines extends beyond student loans. A recent report from the Federal Reserve Bank of New York showed a slight increase in credit card and household debt delinquencies. While student loans are now contributing to these trends, credit cards remain the type of debt with the highest share of balances delinquent for 90 or more days, reaching 11.35%. Rising financial strain is prompting many consumers to take drastic measures to manage expenses.
What Are Borrowers Doing to Cope?
Many borrowers who live paycheck to paycheck have resorted to emergency measures to stay afloat. According to research by PYMNTS, individuals struggling financially are more likely to skip or partially pay bills, cancel services, or seek financial assistance programs. On average, these consumers took nearly twice as many actions to manage expenses as those with more stable financial situations.
Some borrowers have attempted to negotiate their repayment terms, but options remain limited for those with lower credit scores. The impact of missed payments on credit histories could make future borrowing more difficult, further complicating financial recovery for affected individuals.
The end of the student loan leniency period and the subsequent reporting of missed payments to credit bureaus introduce new financial challenges for borrowers. While some have managed to adapt, a significant portion faces worsening credit scores and restricted access to credit. With other forms of debt, like credit cards, also seeing rising delinquency rates, financial institutions and policymakers may need to consider further measures to support struggling borrowers. Those affected should stay informed about repayment options and consider financial planning strategies to mitigate long-term credit consequences.
