9 Million Student Loan Borrowers Will Soon Take a 'Significant' Credit Score Hit

Millions of student loan borrowers are expected to see their credit scores drop by summertime, reversing progress made under pandemic-era protections that lifted credit scores but expired last year.

New York Fed research released Wednesday found that over 9 million borrowers with past-due balances could see "significant" decreases in their credit scores. The warning comes after many student loan borrowers' credit scores increased during the period of federal student loan forbearance, which temporarily suspended payment requirements and interest during the COVID-19 crisis. The typical borrower's score jumped 11 points in 2020, rising from 662 to 673.

Because late payments so heavily hurt credit scores, the gains were much larger for people who had defaulted or delinquent student loans in 2019, according to the researchers. Borrowers with delinquent loans had a typical credit score increase of 74 points in 2020; the median score increased from 501 to 575.

In 2022, borrowers with student loans in default status were able to improve their credit under the "Fresh Start" program, which extended a one-time opportunity for those borrowers to get back in good standing. Median credit scores for borrowers with defaulted loans increased from 564 in the first quarter of 2022 to 608 in the first quarter of 2023.

These improvements are now at risk of being undone, as late payments are starting to show up on credit reports again.

Why borrowers' credit scores could drop

Student loan payment requirements were paused between March 2020 and August 2023, with payments restarting that fall. During a one year "on-ramp" period that ended this past September, federal student loan borrowers' credit scores were protected from the negative credit reporting consequences of missed loan payments.

By 2024, "borrowers with loans in delinquency or in default saw scores that were 103 and 72 points higher, respectively, than at the end of 2019," the report said.

But with the protections gone, defaulted and delinquent debt now appears on borrowers' credit reports.

What's the difference between delinquency and default? Delinquent loans over 90 days past due will be reported to the credit bureaus by the loan servicers. Student loan defaults typically occur after 270 days.

For borrowers behind on their loans, student loan delinquency could mean reduced access to credit and higher interest rates: A new student loan delinquency can often tank a credit score by more than 150 points, the New York Fed researchers wrote. And in addition to the ding to your score, delinquencies typically stay on your credit report for seven years.

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