With 4 Million Borrowers Falling Behind, Student Loan Delinquencies are Impacting Credit Scores

Since payments restarted after a multiyear pause, student loan delinquencies have surged rapidly. And the effects are already impacting borrowers where it hurts—their credit. 

A Newsweek story recently detailed how late payments are now being reported to credit bureaus. “Student loan borrowers are watching their credit scores drop after loan servicers began reporting delinquencies because of missed payments,” the story stated. 

Roughly 4 million borrowers are delinquent already, with the rates rapidly increasing. The Education Department said it would start considering most accounts delinquent if they’re 90 days overdue. 

Part of the problem is borrower confusion. Student loan attorney Adam Minsky explained that “many borrowers have not been in repayment for several years and may not be aware of all of their options.” 

In many cases, existing options weren’t even available. Minsky pointed out that access to income-driven repayment (IDR) applications had been closed until access to the portal was restored on March 26.

Robert Farrington, founder of The College Investor, explains that many borrowers are still unreachable because “people might have signed up for their student loans with their school emails, and that got shut off.” 

He also noted that the loan servicing handoff caused serious confusion, saying, “A lot of borrowers said they didn’t get any kind of notifications.”

Persis Yu, Deputy Executive Director and Managing Counsel at Student Borrower Protection Center, agreed that borrowers have been confused about their student loan debt obligations and which servicers are holding their loans.

“They have been pushed and pulled around a lot in the last couple of years,” Yu said. “A lot of people are very rightfully confused about what their situation is.”

This isn’t theoretical. Borrowers like Shiloh Garcia and Jack Matthews thought their loans were still on pause. It turns out they weren’t—and they’re paying the price. With 43% of federal borrowers still not back on track, millions could see lasting harm to their credit. 

Under current policy, once a federal student loan is 90 days overdue, servicers report it as delinquent to credit bureaus—reducing the borrower’s score. If there are no payments for nine months, the loan defaults, triggering more serious credit consequences.

Deferment or forbearance will temporarily suspend payments for struggling borrowers, but interest usually continues to build in the background. Some borrowers told Newsweek their scores fell “by as much as 200 points” after they missed a payment. 

Meanwhile, President Trump’s executive order aiming to shut down the Department of Education may shift loan management duties over to the Small Business Administration. That would be $1.6 trillion of debt the SBA would have to manage. 

Experts are rightly concerned about disruptions to service, especially considering the SBA has never dealt with anything on this scale.

Then there’s the chaos with income-driven repayment plans. Lawsuits have stalled the SAVE Plan, and the Department of Ed had suspended IDR application processing before recently reopening it. 

Borrowers who either could not or did not recertify are being pushed into higher-cost monthly payments, putting more individuals at risk of falling behind. 

“Borrowers who need to recertify their income are not able to do so,” Minsky went on, “so they face substantial increases to their monthly payments when their current IDR payments expire.” 

Farrington noted that because federal loans don’t have cosigners, delinquencies can’t be spread across households. “It’s the borrower’s problem, and no one else’s credit gets hit,” he said—but that doesn’t mean it won’t affect broader financial stability.

This is not just a borrower’s issue. When millions of people lose credit traction, it affects the economy. They cannot get car loans. They delay buying homes. They cut back on spending. 

“This is a very sizable portion of our population that is credit constrained while they are participating in the economy,” Yu said. “Obviously you can’t have this big of a portion of our population constrained and not have it affect the communities at large.”

A Reuters article recently noted rising delinquencies on all manner of loans from credit cards to auto loans—not just student loans. Inflation is pushing people to the edge, and missed loan payments are a sign of troubled borrowers.

Banks can begin to tighten lending, making credit harder for all people, not only student borrowers, to obtain. And if this snowballs, we can expect more profound economic effects in the sectors that depend on consumer financing.

The proposed shutdown of the Department of Ed has created an uproar. Education groups and teachers’ unions are suing, claiming the executive order bypasses Congress and damages essential oversight. 

Business Insider reported that the advocacy group Democracy Forward filed a lawsuit on behalf of teachers and unions, including the American Federation of Teachers and the American Association of University Professors.

“The Small Business Administration has no business with student loans,” Yu said. “This is a program about access to higher education. It’s about economic mobility for borrowers. (Moving student loans to the SBA is) just not a serious proposal that in any way is designed to make borrowers lives any better.”

There’s also concern about what happens to student aid programs and civil rights enforcement if the Department is dissolved. These court fights could shape the future of federal education policy.

For those involved in the student loan and credit ecosystem, the time has come to recalibrate. Delinquency metrics are no longer a lagging indicator—they’re blinking yellow. 

Loan servicers may need to recalibrate borrower communication strategies and workflows. Credit bureaus can expect volatility in scoring models as millions of borrowers resume repayment under uncertain terms.

There is also a requirement for better alignment among institutions. If the availability of repayment programs remains limited, lenders and credit analysts may want to revisit risk tolerances for particular segments of borrowers. 

As Minsky’s comments bear out, uncertainty about program availability can have outsized effects on repayment behavior—especially among borrowers who are willing but not able to act. 

We’re in uncharted territory, and how the industry responds will shape results for years ahead.