A recent analysis conducted by the Federal Reserve Bank of New York estimates that over 9 million Americans may experience significant drops in their FICO credit scores in the near future. This is due to the inclusion of overdue student loans on credit reports post-pandemic.
The study reveals that more than 15% of individuals holding student loans are currently behind on their payments, a figure slightly higher than pre-pandemic levels. Those impacted by this could find it challenging to secure loans for homes or vehicles and might experience reductions in their credit card limits.
Since the Biden administration ended the temporary suspension of student loan payments initiated during the COVID-19 crisis over a year ago, borrowers have had to resume making regular monthly payments. However, a grace period known as the "onboarding" phase prevented credit agencies from being alerted to any late or missed payments by loan servicers.
As this grace period concluded in September, delinquent student loan payments are just beginning to reflect on individuals' credit reports. The New York Fed's research indicates that falling behind on student loans can significantly reduce FICO scores, with a potential drop of over 150 points for those with average credit and 87 points for subprime borrowers (those with credit scores below 660).
Efforts by the Biden administration, such as the Fresh Start initiative, aimed to assist struggling student loan borrowers in catching up on their payments as repayment obligations resumed. However, despite programs like these, only a fraction of individuals in default took advantage of the opportunities, leaving many still dealing with outstanding debts.
Ongoing uncertainties surrounding the status of the student loan program have added to the complexity. Recent actions, including blocking access to income-driven repayment plans for a period due to a court ruling, have limited options for borrowers to manage their debts. The Trump administration is anticipated to resume involuntary collections on defaulted student loans later this year, potentially through wage garnishments and other means. Additionally, the decision to transfer the student loan program from the Department of Education to the Small Business Administration has introduced further ambiguity into the situation.