Student borrowers' credit scores are taking a hit. Here's why that matters.

CBS News

5 days ago

With student borrowers back on the hook for repaying their loans after years of government leniency, delinquent borrowers are struggling to pay. As a result, their credit scores are getting dinged, hurting their ability to access future credit.
Credit scores dropped by more than 100 points for 2.2 million delinquent student loan borrowers from January through March of 2025, according to recent data from the Federal Reserve Bank of New York. For its report, the Fed looked at a borrower delinquency rate based on shares of student loan borrowers with at least one student loan reported as past due or in default.
Another one million borrowers experienced credit score drops of at least 150 points for the first three months of 2025. A low credit score makes securing future loans both more difficult and more costly, pushing milestones like buying a home, or saving for retirement, further out of reach. It can even impact one's employment prospects.
"The key risk is that this could lead to reduced credit limits and higher interest rates for new loans, which could reduce delinquent borrowers' access to credit, which would then be used for other areas of spending such as on cars and mortgages," Grace Zwemmer, associate economist at Oxford Economics, told CBS MoneyWatch.
Some 2.4 million of the newly delinquent borrowers previously had credit scores above 620, which are considered good and would have allowed them to qualify for new car loans, mortgages and credit cards before the delinquencies were reported, Fed researchers said.
"These borrowers saw substantial declines in their credit standing in the first quarter and will now face steeper borrowing costs or denial for new credit," Fed researchers said in the report.
Grace period expires
Student loan repayments were paused at the onset of the COVID-19 pandemic by President Trump in March 2020, during his first term. After multiple extensions of the payment pause by former President Biden, repayments resumed in October 2023.
The U.S. Department of Education then instituted a 12-month "on ramp" period which expired in October 2024, to give student borrowers some leniency as they resumed payments. During the transition period, loan servicers did not report missed payments or delinquent loans to credit bureaus, protecting many student borrowers from the worst consequences of not making their payments. Borrowers are considered delinquent on their loans when a payment is more than 90 days late.
The pandemic-era pause on repayment had a positive effect on borrowers' credit scores: Between 2019 and 2024, the number of borrowers with credit scores below 620 fell by more than 4 million, as borrowers moved into higher credit score brackets, an analysis from Oxford economics shows.
With that grace period having ended on May 5, newly delinquent student borrowers' credit scores are also being dinged, as their failures to pay back their debts are reported to credit bureaus.
"Borrowers receiving a new delinquency will see a drop in their credit score. This may signal a reversal of the positive credit score trend seen during the pandemic, which would lead to reduced credit limits and higher interest rates for new loans," Oxford Economics researchers wrote in a report.
Long-lasting consequences
Substantial drops in delinquent student borrowers' credit scores will have long-lasting ramifications for those affected, including lower credit limits, higher interest rates for new loans and limited access to credit in general, according to experts.
"The long-term issue is they'll have trouble accessing other types of loans in the future, like mortgage and car loans. It's easier to build credit scores when you don't have negative data, but when you have a delinquency, it's hard to come out of that. It takes a lot of effort," Tushar Bagamane, CEO of budgeting tool Vola Finance, told CBS MoneyWatch.
Consumers with multiple delinquencies report having to pay "exorbitantly high on interest" on larger loans once a delinquency impacts their credit score, Bagamane said.
"They have to pay more on their home loans and the cost of those lines of credit affects the income they have left after meeting their essential needs," he said. "The ability to refinance existing loans with a low credit score can be prohibitively expensive and at that point, borrowers are almost left outside the financial system."
By that he means they can't achieve milestones like owning a home or acquiring other assets, "which is not a good position to be in," Bagamane added.
American dream increasingly out of sight
Zwemmer, of Oxford Economics, noted that a delinquency remains on one's credit report for seven years, and so avoiding becoming delinquent on a loan in the first place is the best course of action. If millions of student borrowers drop into lower credit score brackets, it could exacerbate the divide between low-income and higher-income Americans.
"Older and lower-income segments of the population will be most impacted, so we'll be looking to see if there's a further bifurcation of U.S. consumers," Zwemmer said.
Jason Ackerman, a certified public accountant and co-founder of WealthRabbit, a retirement planning platform, said that as their credit scores drop, those who can least afford to shoulder higher borrowing costs will see their rates rise.
"Younger people are getting further behind on the American dream of buying a house and saving for retirement," Ackerman told CBS MoneyWatch. "Their payments get higher — and the more you're putting toward student loans, the less you can put toward other things."