Written by: Eric Bank
Edited by: Lillian Guevara-Castro
Reviewed by: Lynn Cadet
Key Takeaways
- Millions of student loan borrowers have already watched their credit ratings fall, validating previous warnings.
- Subprime borrowers are feeling the brunt of the damage, with many of their scores dipping below 550.
- Missed payments are increasingly being reported to credit bureaus, reducing access to credit overall.
Student loan borrowers who fell behind on payments once the pandemic pause was over are beginning to see the effects on their credit histories. And for those already living on the credit precipice, the effects have been brutal.
We last reported in the spring that over 20% of federal student loan borrowers were 90 days or more overdue. This was an increase from only 11.5% prior to the pause. TransUnion cautioned that the delinquencies would start to impact credit scores in the coming months — and they were correct.
The loan crisis that has loomed over students since payments resumed is no longer theoretical. Now, we are beginning to see the resulting credit damage.
Borrowers across all credit levels are being affected, but subprime consumers, those in the worst position to weather this crisis, are being hit the hardest. For these borrowers, credit ratings are slipping below the 550 benchmark, effectively closing the window of new credit availability for them.
Those in the more secure position are affected as well. Some student loan borrowers have suffered a loss of up to 175 points. On average, scores fell by about 63 points for those who faced default.
Delinquencies Now Appearing on Reports
Credit bureaus have resumed reporting the missed payments, making the delayed reckoning a real-time credit crisis.
In the period immediately after payment resumption, some servicers deferred reporting missed payments — perhaps as part of a temporary accommodation strategy to avoid adding to borrower confusion. That grace period seems to have ended.
Lenders are also realizing the damage as they pull fresh credit reports. Missed payments are being reported, sometimes in batches, as servicers play catch-up.
This is spawning a new wave of adverse action letters and account rejections, particularly for subprime borrowers trying to open lines of credit or become homeowners.
The visibility of these delinquencies has also affected risk measurements, with lenders retreating from unsecured credit and tightening underwriting standards. The harm is not merely to specific credit scores — it is reshaping entire portfolios.
Subprime Borrowers Find Fewer Alternatives
TransUnion previously cautioned that nearly half of subprime student loan borrowers were already in arrears. That number may well be larger now. As the ratings for these borrowers fall below 550, conventional credit becomes more unobtainable.
Lenders generally use 580 as the floor for consumer loans and credit cards and 620 for auto loans and mortgages. For many subprime consumers falling below those levels, even minimal access to credit is an issue.
It can drive more consumers to the payday loan and other expensive approaches to credit, which aggravates their financial distress.
It also presents issues for fintech lenders and credit-building platforms. Subprime markets are serviced by those who may have to rework their models in light of the rising tide of defaults.
We will likely see credit card issuers tightening their standards on subprime applications and pulling offers in regions with above-average student loan delinquency.
The Outlook May Worsen
We may not yet be finished falling. TransUnion has reported that there was a buildup of unreported delinquencies as servicers struggled to process volume and system shifts. Some of those accounts are only starting to surface, so additional score damage may soon be in store.
To add to the uncertainty, the Department of Education has also resumed aggressive collections behavior, such as garnishments and tax refund withholding. These actions coupled with the credit reporting damage may drive more borrowers further into financial hardship.
The resulting economic drag may be substantial as consumer spending is reduced.
Access to credit is not the only danger. Employers and landlords also draw credit reports — and a precipitous slide in score can harm apartment lease applications, as well as employment opportunities in the most sensitive industries.
As more borrowers slide below the critical credit levels, the wider repercussions will flow well beyond loan decisions.
What Borrowers Can Do Now
Consumers already in arrears cannot wait for things to go from bad to worse. Some alternatives they have available:
- Enroll in income-driven repayment plans: These can reduce monthly payments and put accounts in good standing.
- Check credit reports often: Regular monitoring of reports can indicate errors or unforeseen hits and provide borrowers with the opportunity to correct them.
- Deal with servicers directly: In certain circumstances, missed payments can be reinstated or disputed, particularly during this transitional period.
- Obtain credit counseling: Nonprofits can provide advice on how to handle delinquency and repair credit.
As we predicted earlier, the student loan default wave was always to occur most severely following the reporting delay period. That day has arrived. It is time for borrowers — and the lenders that serve them — to adjust to more stringent credit conditions.
“We are continuing to analyze data to determine how many non-payers are at risk of being reported as seriously delinquent or default,” said Michele Raneri, vice president of U.S. research and consulting at TransUnion.
