That’s according to a new analysis from the Federal Reserve Bank of New York.
An analysis by the Federal Reserve Bank of New York reveals that some nine million student loan borrowers could see their credit scores drop – and it stems from the end of pandemic loan forbearance policy.
The federal loan forbearance policy was first enacted by then President Donald Trump in his first term in 2020 and continued by President Joe Biden until it ended on August 31, 2023. It essentially granted individuals a pause in repaying their loans due to the COVID pandemic hardships.
According to the New York Fed analysis, the forbearance policy initially improved credit scores by an average of 11 points, with those marked as delinquent seeing more sizable jumps in their scores.
“The 2020 forbearance marked all delinquent (but not defaulted) loans as current, causing a jump of 74 points, from 501 to 575, in the median score between 2019:Q4 and 2020:Q4 for those borrowers who were previously delinquent but not defaulted,” the authors, Daniel Mangrum, research economist, and Crystal Wang, research analyst in the NY Fed’s Research and Statistics Group. “Since then, scores continued to rise for previously delinquent borrowers (as their negative remarks aged) while scores for previously current borrowers remained relatively flat.”
By the end of 2024, they said, borrowers with loans in delinquency or default saw their scores some 72 to 103 points higher than they were at the end of 2019. But the median score for this group was still in subprime territory, below 620. The share of borrowers with subprime credit scores dropped from 36.3% in 2019 to 28.3% in 2024.
Q1 2025 could show uptick in delinquencies
But the authors note that quarterly report for the first quarter of 2025 will likely show a significant uptick in the delinquency rate, citing trends from the New York Fed Consumer Credit Panel (CCP) — a national sample of credit reports from Equifax.
“After payments resumed, the volume of past due federal loans quickly returned to pre-pandemic levels and reached a new high of 15.6 percent by the end of the on-ramp period, with more than $250 billion in delinquent debt held by 9.7 million borrowers,” stated Mangrum and Wang.
They note that while some of these borrowers may be able to cure their delinquencies by making missed payments or going into forbearance with their loan servicers, the damage to their credit standing will be done.
“Given these estimates, we expect to see more than nine million student loan borrowers face substantial declines in credit standing over the first quarter of 2025,” the analysis states. “The aggregate impact on overall credit access due these declines in credit scores will depend on the previous credit standing of those with past due loans.”
If missed payments come mostly from those with lower scores, the aggregate impact will be smaller. That’s because those with low credit scores will see smaller declines and already have relatively limited credit access. However, if prime and super-prime borrowers – those with higher credit scores — fell behind on their payments, the aggregate drop in credit standing could be much larger.
“This would result in reduced credit limits, higher interest rates for new loans, and overall lower credit access,” the authors concluded.
