Millions of student loan borrowers are delinquent following the expiration of pandemic-era student loan relief and changes to repayment plans. Those delinquencies trigger an average 62-point FICO score drop for borrowers who fall behind, which can make it more difficult to qualify for new loans and increase borrowing costs.
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Student Loan Delinquencies Are Rising
As borrowers adjust to the end of relief programs and a return to required payments, . More than four million student loan borrowers are delinquent on their loans, essentially with no payments since the pandemic protections expired.
Jillian Hishaw, founder and managing attorney at Hishaw Law LLC, says many student loan borrowers who graduated in 2020 or later never had to make a payment until pandemic-era protections expired.
“They have no experience about how it was pre-COVID and the burden in paying every month,” says Hishaw. “Many do not realize that consequences in missing payments can lead to garnishments and property liens.”
Many borrowers also face changes to repayment plans and monthly payments after annual income recertification.
“The constant changes surrounding repayment plan changes over the past three years have also caused tremendous borrower confusion, resulting in borrowers failing to repay as expected,” says Stacey MacPhetres, senior director of education finance for EdAssist by Bright Horizons. She notes that higher costs of living have also left many borrowers with less disposable income.
Credit Scores Suffer Under Delinquent Student Loans
Payment history is the most important factor in , so missing a student loan payment can quickly damage your credit score. Student loan borrowers with new delinquencies see, on average, a 62-point drop in their score, according to data from the .
How much your credit score declines depends on where your credit score started and your overall credit profile. Federal student loans become delinquent as soon as you miss a payment and default after 270 days.
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How a 62-Point Drop Affects Borrowers
A 62-point drop from new student loan delinquency can move your score into a lower credit tier. Borrowers with an average FICO score of 714 are firmly in the of 670 to 739. But a 62-point decrease to 652 drops into the fair credit range of 580 to 669.
A lower credit score can affect your ability to borrow for school, mortgages, credit cards and auto loans. Negative marks typically remain on your credit report for up to seven years.
Once a student loan reaches default, the entire unpaid balance becomes due. Additional charges, including collection, processing, court and attorney fees, may be added to the balance. Unpaid balances can be collected with garnishment of wages, tax refunds and federal retirement payments.
“Defaulting on federal student loans can be extraordinarily expensive to borrowers,” says MacPhetres.
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Impacts Beyond Student Loans
The damage isn’t limited to borrowing, as insurers in many states use credit-based insurance scores to set premiums. A lower score could cost you more for auto or homeowners insurance.
Existing credit accounts may also be affected, as credit card issuers may reduce credit limits or close accounts if they consider your lower credit score an increased risk. Closed credit card accounts can reduce financial flexibility and further lower your credit score by affecting your length of credit and increasing your credit utilization ratio.
How To Avoid or Recover From Student Loan Delinquency
The sooner you contact your servicer, the more options you’ll have.
Ignoring missed payments can lead to additional fees, negative credit reporting and default. Student loan servicers may have options that can make payments more manageable, such as switching to an income-driven repayment plan that adjusts your payments based on your earnings.
“Borrowers should avail themselves of opportunities to select a repayment option based on their ability to repay,” says MacPhetres.
You may still be able to with loan rehabilitation if you’re behind on payments. Loan rehabilitation typically requires nine on-time payments over 10 months, or loan consolidation, which combines your loans into a new repayment plan that gets your loan out of default.
“Borrowers should never ignore communications from the U.S. Department of Education or from their student loan servicers,” says MacPhetres. “Federal student loans allow for more borrower flexibility than other forms of consumer debt.”
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