Millions of Americans are falling behind on student loan payments a year after the pandemic freeze ended – and soon that will start hurting their credit scores.
In a report released last month, the Government Accountability Office estimated that about 10 million borrowers – more than one-quarter of the total – were behind on payments as of the end of January. About two-thirds of them were more than three months late, meaning they’d normally be classified as seriously delinquent.
Right now those borrowers are shielded from taking a hit to credit scores, because the Biden administration ordered a one-year moratorium – starting from the post-pandemic resumption last year – during which missed student payments can’t be included in credit reports.
But when that protection ends next month, a large share of student debtors will likely fall into delinquency.
“We will be carefully watching these figures as we begin seeing delinquencies reported once the moratorium ends,” said Liz Pagel, senior vice president at TransUnion, a consumer credit reporting agency.
After several years of amnesty, the effect will be to squeeze credit access for millions of households – at a time when the job market is also slowing, and high interest rates are biting into budgets.
Lower credit scores make it harder for consumers to buy homes or cars, start a business, or get loans to cushion against economic shocks. Women and Black and Hispanic Americans, who tend to hold more student debt, could be disproportionately affected. By age, Americans in their 30s and 40s will likely be worst hit.
It’s hard to determine exactly how many student borrowers risk seeing their credit scores dinged. The Department of Education didn’t immediately respond to requests for an update on the January numbers that were cited in the GAO report.
Transfers from Education to the Treasury suggest there’s been a steady decline in student loan repayments over the past year. Last summer, around the time when payments resumed, monthly transfers were about $7 billion — roughly where they were before Covid hit. Last month the figure fell to $4.1 billion – the lowest since 2014, excluding the pandemic freeze.
But that decline doesn’t necessarily mean more borrowers are slipping into default. Many are also signing up for new government programs that enable them to lower payments.
While its main loan forgiveness initiative was blocked by the Supreme Court, the Biden administration has rolled out various other programs to help student debtors. One of the main ones is the SAVE plan, which ties monthly payments to household size and earnings, and enrolled some 8 million borrowers.
“Under that plan, payments for many people will go to zero or a fraction of the usual amount,” said Adam Looney, a senior fellow at the Brookings Institution who’s specialized in student debt issues. More enrollments to that plan could help explain why monthly payments are lower, he said.
In April the Education Department said that average monthly payments had fallen from $348 before the pandemic to $299, largely as a result of such programs. Since then — further complicating the picture — the SAVE plan has also been put on hold by courts.
All told, via various programs, the Biden administration has forgiven some $168.5 billion in student debt. After steadily climbing for decades, the nationwide total has held steady at around $1.6 trillion since late 2020, according to the Federal Reserve Bank of New York.
Still, student-loan delinquencies and defaults were typically much higher than for other kinds of debt before the pandemic freeze. That trend looks set to resume, even if it will take some time to figure out the precise level amid all the legal confusion.
Pagel said that TransUnion is detecting an especially sharp deterioration in payment rates among subprime student borrowers, with less than 10% of them staying current as of June.
While delinquency reporting resumes in October, she said a full assessment of repayment rates won’t be possible until December at the “absolute earliest.”
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