The return to student loan repayment now looms with the potential to tank the credit scores of millions of borrowers. According to VantageScore, having a late payment on your college loans can severely lower your credit score. You’ll even risk losing up to 129 points! That one-year moratorium on reporting defaults on such loans is scheduled to end soon. Many borrowers will be considered in default after only 90 days of nonpayment. Over 9 million student loan borrowers are about to see significant changes. Beginning in the first half of 2025, nearly all of them will face steep declines in their credit scores.
Beginning on May 5, 2024, an estimated 5 million borrowers will have their university and college loans placed into collections. The repercussions of these changes go well beyond consumer finance, with serious implications for our economy at large. Many people are reluctant to enter larger credit transactions due to increased credit score concerns. This cause for alarm has potential to set off a domino effect across state and local governments.
Effects of Delinquency on Credit Scores
Under the terms of federal student loans, borrowers are considered delinquent after missing a payment for 90 days. Judith Scott-Clayton is an associate professor of economics and education at Teachers College, Columbia University. She explains how these delinquencies impact credit scores in real-time.
“These credit score effects show up with delinquencies – that’s when the credit score takes the hit,” – Judith Scott-Clayton.
Subprime borrowers, traditionally defined as borrowers with credit scores at or below 620, suffer grave effects. If someone ends up needing to miss a payment, they lose an average of 87 points on their credit score. These large cutbacks may restrict access to credit and raise the cost of borrowing.
Additionally, effects of delinquency can pile on, sometimes even increasing in severity over time. According to Kate Wood, a student loan expert at NerdWallet, the longer you remain delinquent, the worse the penalties get. These repercussions severely hurt a person’s credit rating.
“The longer you remain delinquent, that will compound,” – Kate Wood.
Broader Economic Implications
The changes coming down the pike threaten to hurt the poorest of borrowers and have negative effects that ripple through the entire economy. Kirabo Jackson, a professor of education and social policy at Northwestern University, draws attention to an urgent concern. Homebuyers are unable to keep up with major expenditures such as personal automobiles as their credit rating scores slip.
“We’re talking about a chunk of the population who won’t be able to buy a car because they won’t be able to get access to a car loan or it will be prohibitively expensive,” – Kirabo Jackson.
When borrowers face compromised credit scores, their chances of qualifying for loans evaporate. In turn, this has a ripple effect on their purchasing power and can result in a reduction of consumer spending. Economists are concerned that these trends might add obstacles to economic recovery from the COVID-19 pandemic.
Resuming Payments and Policy Decisions
The Biden administration’s decision to end the moratorium on reporting loan defaults this October has already left many borrowers dangling. This policy change comes on the heels of an unprecedented wave of pandemic-related financial relief. At this time, federal student loan payments were paused.
The stakes of this policy shift couldn’t be higher, as millions of borrowers are now being pushed into new delinquencies and defaults. As economist Judith Scott-Clayton has written, this is the key point. The result is particularly severe for people who used to have high credit scores and now just miss a payment.
“The consequences are worse for those starting out with good credit scores,” – Judith Scott-Clayton.
Borrower delinquencies are skyrocketing. Protect yourself Experts recommend that all borrowers remain vigilant about their payment plans and understand the dangers associated with missed deadlines.
