Americans with student loans are waking up to the reality that skipping payments comes with consequences again.
The pandemic-era relief on federal student loans ended in October, starting the 90-day clock people have to make payments before their credit scores take a hit. Now that time is up, and borrowers are feeling the pain.
Shiloh Garcia was notified by her bank this month that her credit score had dropped from 720 to 620. She discovered she was more than 90 days delinquent on payments for her $16,000 in student loans, which she had thought were still suspended.
Pandemic-era relief on federal student loans has ended. – Cody O’Loughlin for WSJ
Her mortgage broker estimated the lower score would add $400 to the monthly payment for the new home she wanted to buy.
“I’m devastated,” said Garcia, a 39-year-old nurse in Modesto, Calif. “It’s like having your whole life put in limbo over a simple mistake.”
About 43% of borrowers who owe payments on federal student loans haven’t resumed making them, according to an analysis of government data by VantageScore, a credit-score provider. That puts more than nine million people at risk of a serious credit-score drop, with two million of those on track to fall into subprime status.
The setbacks could have ripple effects throughout the economy, putting homeownership or a new car further out of reach for late-payers, who are largely ages 25 to 50. Lower scores can also mean lower credit-card limits and higher rates, which could be a drag on consumer spending, a crucial engine of the U.S. economy.
Borrowers cite a mix of reasons for not resuming payments, including confusion over their loan status and inadequate communication from loan servicers, the companies that collect payments on behalf of the government. Some say bill reminders were sent to outdated home or email addresses from when the Covid-19 pandemic started.
Ben Kiser, a spokesman for loan servicer Nelnet (NNI), acknowledged the concerns from some borrowers about communication. But he said in a written statement that “like any credit card, auto loan, mortgage loan, or consumer loan it is ultimately the borrower’s responsibility to ensure their loan servicer has accurate contact information.”
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The student-loan saga began in 2020, when the pandemic hit and the government paused payments on federal loans and stopped interest from accruing.
The reprieve looked as if it would become permanent in 2022, when the Biden administration tried to completely cancel loans for a swath of borrowers. The Supreme Court tossed that decision a year later, putting payments back on track to resume. That was set to happen in September 2023, but the Biden administration decided to give borrowers another year before reporting delinquencies to credit bureaus.
The Education Department and loan servicers reached out to borrowers with emails and texts in 2023 before payments were required again, according to a Government Accountability Office report this past July.
People with higher credit scores could be hardest hit. Those with scores above 780 could see a 129-point drop on average if they had a serious delinquency, according to a simulation by credit-reporting company TransUnion. Those with scores of 600 or below might see a 16-point drop on average.
Not all borrowers are at risk. Of the 45 million people with some federal student-loan debt, more than 11 million are on time with payments. Millions more remain exempt from payments under programs for unemployed or low-income people, some of which are tied up in courts.
Jack Matthews is among those who noticed this month that his credit score took a hit, falling from 784 to 620.
Matthews, 28, said his loan servicer had been contacting an old email and home address for his parents. It is possible he ignored calls from the company, Nelnet, if he didn’t recognize the number, Matthews said. He added that he didn’t get any voice mails or text messages from the loan servicer.
As a result of his lower score, his mortgage lender said he would now need a cosigner for the new home in Colorado he had been planning to buy.
“I had the whole down payment ready,” Matthews said. “I don’t have anyone to cosign and who knows how long it will take to get that score back up.”
Garcia, the California nurse, said she didn’t resume making payments because she had applied for a program that lowers payments based on income. The program, SAVE, was created under the Biden administration and is being challenged in courts. Meanwhile, payments in the program were suspended.
After seeing her credit score hit, Garcia called Nelnet. The loan servicer eventually told her it had no record of her SAVE application.
Garcia plans to file a complaint with the Consumer Financial Protection Bureau. Other borrowers who have done so fear they won’t ever hear back from the bureau given the Trump administration’s mass layoffs at government agencies.
