Millions of student loan borrowers are behind on payments. What it means for the economy.
After a roughly five-year hiatus, student loan borrowers are once again seeing their credit scores plunge if they fall behind on payments. Economists say it could be bad news for borrowers and the economy at large.
A recent report from the Federal Reserve Bank of New York found the delinquency rate for student loans surged from less than 1% in the fourth quarter of 2024 to nearly 8% in the first quarter of this year as a pause on reporting delinquent loans ended. That's sent some credit scores into a free fall, making it more difficult for borrowers to secure affordable loans or pull off major purchases.
The Federal Reserve Bank of New York said more than 2.2 million newly delinquent student loan borrowers' credit scores plunged more than 100 points. More than 1 million had scores drop at least 150 points.
"We could see millions of borrowers potentially locked out of the conventional mortgage market, they could see the cost of a car loan double, they could find it harder to find rental housing," said Aissa Canchola Bañez, the policy director at the Student Borrower Protection Center, an advocacy group focused on alleviating student loan debt. "The immediate harm, but also the long-term harm, is just massive."
The federal government's pandemic-era student loan payment pause lifted in September 2023, but it wasn't until the fall of 2024 that payments at least 90 days past due could be reported to credit bureaus. Those delinquencies started appearing on credit reports in 2025.
As of the first quarter, nearly 1 in 4 student loan borrowers required to make payments were behind on their loans, according to the Federal Reserve Bank of New York.
Much of that surge could be driven by confusion around loan payments restarting, according to Beth Akers, a senior fellow who focuses on the economics of higher education at the American Enterprise Institute, a conservative think tank.
The pause – which began under President Donald Trump's first administration – was extended multiple times under former President Joe Biden. Meanwhile, online rumors claimed all student loans had been permanently canceled under Biden. Biden did attempt to forgive $400 billion worth of student debt, but the plan was ultimately struck down by the Supreme Court.
'For a long time, I think borrowers thought their loans were canceled. Or that they'd never have to repay them. And I don't blame anyone for believing that,' Akers said. 'We really confused the heck out of borrowers.'
Other borrowers may not be financially prepared to pay back their loans, especially after falling out of habit with their monthly payments.
"The economy is very different than it was pre-COVID," said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit based in Plymouth, Massachusetts. "Things like housing and eggs and lettuce cost a lot more than they did prior to COVID. So a payment that might have been affordable in 2020 might not be affordable now."
A paper co-authored by Michael Dinerstein, an associate professor of economics at Duke University in North Carolina, found the student loan pause allowed borrowers to take on other forms of debt, such as mortgages, credit card loans and auto loans. Now, those borrowers are also on the hook for student loan payments that can cost hundreds, if not thousands, each month.
Another possible factor? This year's surge may be tied to an influx of late payments that would have been spread out across multiple years without the pause, according to Kristin Blagg, principal research associate in the Work, Education, and Labor Division at the Urban Institute, a Washington, D.C.-based think tank.
"In an average year, about a million people enter default," Blagg said. "And what we've had is almost five years of students not getting to that default period. So you can think of this being almost a build-up of folks who would have defaulted during that time who are just now reaching that point."
About 5.6 million borrowers were considered newly delinquent in the first quarter of 2025. The Federal Reserve Bank of New York in March estimated that more than 9 million student loan borrowers will face significant credit score decreases by the end of June.
Reese Wallace, 34 of Oakland, California, watched his credit score plunge from above 700 to 488 this year after he stopped paying his student loans.
A 2023 graduate from the California College of the Arts, Wallace left school with roughly $50,000 worth of student debt. Monthly payments were nearly $500 per month, which Wallace said was untenable on a studio artist wage in the Bay Area.
Wallace said he quit paying his loans last year to put the money toward graduate school applications, under the impression that his loans would be automatically deferred as he applied. He realized that wasn't true when his application for student housing at the University of Nevada, Las Vegas, was rejected due to his low credit score.
The credit score has thrown a wrench in Wallace's plans to move for graduate school. He had to get a cosigner for housing, and worries he'll have trouble affording a car after years of traveling with public transportation in California.
"What kind of vehicle can I get with a 488 credit score?' he asked. 'It's honestly going to be really, really difficult.'
Akers believes resuming student loan payments is fair to taxpayers, but said there can be 'serious trickle-down implications' when credit scores take a hit, especially since the baseline interest rate is already high.
'People are quick to think about the ability to finance the purchase of a new home at an affordable interest rate,' she said. 'But also employers look at credit scores sometimes. When you're renting a home, they look at your credit score.'
Borrowers could find themselves in more hot water if they continue to miss payments. After 270 days, the government can seize wages, tax returns or Social Security benefits. The Office of Federal Student Aid is expected to send notices on wage garnishments this summer.
Student loan defaults: Benefits could be withheld from 5.3 million defaulted student loan borrowers, feds say
Economists warn restarted payments and sinking credit scores could deliver another hit to an economy that has already shown signs of slowing this year.
'It's another potential drag,' Blagg said. 'We don't have a good sense of how big it is compared to all the other things that are going on in the moment, but any time there's a dollar spent servicing loans, it's a dollar that's not being put into the economy or saved for a big purchase."
Morgan Stanley economists estimate increased loan payments could lower real GDP growth by up to 0.15 percentage points this year as payments increase by $1 billion to $3 billion per month. Their May 5 report says the GDP impact is "relatively small," but describes this as "another headwind" for consumers.
Canchola Bañez of the Student Borrower Protection Center shared advice for borrowers who are delinquent on their loans:
Borrowers should explore repayment options at Studentaid.gov. Canchola Bañez said income-driven repayment plans are likely their best option. This shift could take time; there's a backlog of roughly 2 million federal student loan borrowers requesting income-driven repayment plans, according to figures from the Education Department. Borrowers can be in forbearance while their application is processing, which means they won't have to make their loan payments while they're waiting for approval on a more affordable payment plan.
If a borrower is more than 270 days behind on their loan, the Education Department lays out three options to get out of default:
Repay the loan in full (not practical for most borrowers).
Loan rehabilitation: Borrowers can contact the loan holder and agree in writing to make nine affordable monthly payments within 20 days of a set due date, all within 10 consecutive months.
Loan consolidation: Borrowers agree to repay a new "Direct Consolidation Loan" under an income-driven repayment plan or make three full, consecutive, voluntary, on-time monthly payments on the defaulted loan before it is consolidated. While this option is faster, accrued interest is added to the principal balance, which could have borrowers paying more overall.
This article originally appeared on USA TODAY: Student loan delinquencies are up. What it means for the economy.
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