Student Loan Delinquencies Plummet Credit Scores

The return of student loan payments has brought an unwelcome surprise for many borrowers: a significant drop in their credit scores. As the COVID-19 pandemic-era payment pause comes to an end, borrowers are facing the consequences of missed payments and delinquencies being reported to credit bureaus. This development is particularly concerning for student loan borrowers, who may already have lower credit scores due to their financial situation.

According to VantageScore, a major credit-scoring firm, missed payments could cause credit scores to drop by as much as 129 points. This is because payment history is the most heavily weighted factor in credit scores, accounting for 35% of the FICO score. In comparison, other types of borrowers, such as those with credit card or auto loan debt, may also experience credit score drops due to missed payments, but the impact on their scores might be less severe due to the lower proportion of their overall credit mix that student loans represent. Additionally, student loan borrowers may have less established credit histories, making them more vulnerable to the impact of missed payments on their credit scores.

The timing of missed payments and the subsequent reporting to credit bureaus can significantly impact the severity of the credit score drop for student loan borrowers. Borrowers are designated as delinquent once they miss a payment, but only after 90 days of non-payment will a loan servicer report the late payments to the national credit bureaus. This means that the longer a borrower goes without making a payment, the more severe the impact on their credit score will be.

For example, VantageScore estimates that missed payments could cause credit scores to drop by as much as 129 points. This is because the longer a borrower goes without making a payment, the more negative information is added to their credit report, which can significantly lower their credit score. Additionally, the longer a borrower goes without making a payment, the more likely they are to fall behind on other financial obligations, which can also negatively impact their credit score.

Furthermore, the information provided also notes that borrowers who have not made payments since before the pandemic, and the grace period preventing negative reporting ended last fall, are particularly at risk of seeing a significant drop in their credit score. This is because these borrowers have likely gone the longest without making a payment, and the negative information on their credit report has had the most time to accumulate.

The long-term consequences of a steep drop in credit scores for student loan borrowers can be significant, impacting their access to credit and the interest rates they'll pay for future loans. A lower credit score can make it more difficult for borrowers to qualify for new credit, such as credit cards, auto loans, or mortgages. Lenders are more likely to deny applications from borrowers with lower credit scores, as they are seen as riskier. For example, VantageScore projects that 2.3 million borrowers will fall into "subprime" credit territory (below 600), which could limit their access to affordable lending options.

Borrowers with lower credit scores typically face higher interest rates on new loans. This is because lenders charge more to compensate for the increased risk of lending to borrowers with lower creditworthiness. For instance, a borrower with a credit score of 620 might pay an interest rate of 15% on a credit card, while a borrower with a score of 780 might pay only 10% (Source: Experian, 2021). This can make it more expensive for borrowers to borrow money in the future.

A lower credit score can also make it more difficult for borrowers to refinance or consolidate their loans, which could help them lower their monthly payments or simplify their debt management. Lenders may be less willing to offer favorable terms to borrowers with lower credit scores, or they may charge higher interest rates to compensate for the increased risk.

In summary, the steep drop in credit scores for student loan borrowers can have long-term consequences, including limited access to credit, higher interest rates, difficulty refinancing or consolidating loans, and a long-lasting negative impact on their credit history. These consequences can make it more challenging and expensive for borrowers to manage their finances and achieve their financial goals in the future.