A Reckoning for Borrowers Behind on Federal Student Loans

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If you’re behind on your federal student loans, this year is pivotal.

It’s the first year since the pandemic began – including the three-plus years when all loan bills were suspended — that not paying counts against your credit score. And borrowers who are 90 days or more overdue on payments could see a significant hit, researchers from the New York Federal Reserve Bank said this week.

In some cases, delinquent borrowers risk a drop of more than 150 points once their missed payments appear on their credit reports, they estimated.

Why now? Because after an unprecedented 43-month reprieve triggered by the pandemic, the government resumed billing in October 2023, but gave borrowers a year’s notice before reporting missed payments to the major credit bureaus. Add to that 90 days for delinquencies to roll through to those credit reports, and here we are.

“We expect to see more than nine million student loan borrowers face substantial declines in credit standing over the first quarter of 2025,” the New York Fed’s Daniel Mangrum and Crystal Wang wrote on their Liberty Street Economics blog Wednesday, implying that some borrowers may have already seen the hit.

“Although some of these borrowers may be able to cure their delinquencies – either through making up missed payments or by entering an administrative forbearance with their loan servicers – the damage to their credit standing will have already been done and will remain on their credit reports for seven years,” they wrote.

The study estimated the potential for credit score damage using delinquency and credit score data from prior to the pandemic. Once a delinquency of 90 days or more is reported, those with higher credit scores could see a bigger average drop than those with lower scores, the researchers said.

Borrowers with a credit score of 760, for example, could see it decline to 589, while those with a score of 620 may see it fall to 477, according to their estimates.

(Worth noting: Borrowers who were already behind or had fully defaulted before the pandemic were granted a clean slate during the payment break, which lifted median credit scores significantly, according to the research. This means any declines that may be coming are relative to those inflated scores.)

So what? It’s been a strange and turbulent few years for people with government student loans, and the Trump administration is pursuing more changes. If you’re struggling financially — or your payment obligation has suddenly increased — you’re not alone. As of September 2024, 9.7 million borrowers were delinquent on more than $250 billion in loans, the researchers estimated.

But now is a critical moment to stay current with your payments. Having a lower credit score can increase the cost of borrowing and make it more difficult to even get a credit card, car loan or mortgage.

So give your next steps careful consideration by taking stock of all of your options and staying on top of any developments. The online application for income-driven repayment plans just became available again Wednesday. Or you may want to consolidate or refinance your loans, find ways to lower your other expenses, or even pursue forbearance.

Related Reading

•   U.S. Department of Education Opens Revised Income-Driven Repayment Plan and Loan Consolidation Applications for Borrowers (U.S. Department of Education)

•   Student Loan Balance and Repayment Trends Since the Pandemic Disruption (Liberty Street Economics)

•   Moving Student Loans to the SBA Could Create Problems for Borrowers, Experts Say (Investopedia)

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