A new study by the Federal Reserve Bank of New York says that in the next few months, delinquent student loans will show up on credit records for the first time since the pandemic. This could cause “substantial declines” in the FICO scores of more than 9 million Americans.
A little more than 15% of people with student loans are likely behind on their payments now, according to the study. This is a little more than before the pandemic. Some people may have a harder time getting home or car loans, or their credit card limits may go down.
People who took out student loans have had to make regular monthly payments on them for more than a year now, since the Biden administration stopped the COVID-era pause on the program. But for a short time, they were helped by a process called “onboarding,” when loan servicers were not allowed to tell credit agencies about late or missed payments.
In September, that grace period was over. Servicers can’t report a loan as overdue until it’s been past due for 90 days, so Americans’ credit scores are only now showing that they have late student loan payments.
People who are behind on their payments could see a big change in their reputation. According to the study from the New York Fed, someone with average credit can lose more than 150 points on their FICO score if they are late on their student loans. It can take away 87 points from the scores of risky borrowers, whose scores are below 660.
When student loans started to be paid back, the Biden government did a number of things to help people get caught up on their payments. One of those was the Fresh Start program, which helped people who had fallen behind on their payments get back on track without having to pay any extra fees. The Department of Education says that only about 900,000 people took advantage of the deal, leaving millions more still in default.
The recent uncertainty about the status of the student loan program might not be making things better. In reaction to a court ruling, the administration has been blocking access to income-driven repayment plans for the past month. These plans limit how much borrowers owe each month to a percentage of their earnings. This has left many people with fewer ways to deal with their debts. Finally, those forms were available again on Wednesday.
Many people also think that the Trump administration will start collecting on people who don’t pay their student loans again sometime this year, but it’s not clear if they have a plan for doing so. This can include taking money out of people’s paychecks and government benefits like Social Security payments. Things are even less clear now that the government has said that the student loan program will be moved from the Department of Education to the Small Business government.
Credit bureau data has always been used by the New York Fed to keep track of the amount of past-due student loans. However, that was not possible during the pandemic payment pause and onboarding time because agencies were not told about late payments. It used both the Department of Education’s data on its own student debt portfolio and information on loans that were past due that were not owned by the government to come up with its new estimate. VantageScore, a company that does credit modeling, also said that there are about 9 million loans that are past due.
