Student Loan Delinquencies Soar, Impacting Americans’ Credit Scores
Borrowers in the United States are facing significant challenges as student loan delinquencies reach unprecedented levels, leading to substantial declines in credit scores. A recent report from the Fair Isaac Corporation (FICO), a leading credit scoring agency, reveals that over 10% of consumers with student loans have not made a payment in more than 90 days.
As of April 2024, the report indicates that approximately 21 million consumers are scored by FICO, with 10% having scheduled federal student loan payments. Of this group, about 6.1 million borrowers experienced a delinquency recorded on their credit reports between February and April, marking a troubling trend in financial health.
Rising Delinquency Rates and Credit Score Impacts
The report highlights a dramatic increase in delinquency rates, which surged by 25% from last year, rising from 7.9% to 9.8% in April. The implications for borrowers have been severe; on average, those with student loan delinquencies saw their credit scores drop by 69 points, pushing the average score below 600. Alarmingly, nearly 25% of these borrowers experienced declines exceeding 100 points.
In addition to those already facing delinquencies, FICO noted that another 1.9 million consumers have not made any payments since October 2023. While this group has not yet seen delinquency reported, they have managed a slight average credit score increase of two points. In contrast, the 12.9 million borrowers who have made at least one payment since October witnessed a negligible one-point drop in their scores during the same period.
The report attributes the severe impacts on credit scores to the importance of recent and severe delinquencies in the FICO Score calculation, particularly in the “Payment History” category, which comprises roughly 35% of the overall score.
Generational Disparities in Credit Score Changes
Among various demographics, Gen Z has experienced the largest year-over-year decline in credit scores since 2020. Approximately 34% of Gen Z members hold student loans, which is double the rate of the broader population assessed in FICO’s report. This demographic shift underscores the growing financial burden on younger borrowers.
This situation marks the first significant impact of unpaid student loan payments on credit reports since the implementation of the CARES Act in March 2020, which allowed consumers to pause federal student loan payments until October 2023. Although delinquencies did not appear on credit reports during this period, they began to surface in February 2024 due to a 90-day delay in reporting after payments became overdue.
The U.S. Department of Education reinstated student loan collections in May 2020 under the previous administration, further complicating the financial landscape for borrowers.
As the landscape of student loan repayment evolves, the ramifications of delinquency are becoming increasingly apparent, leaving many Americans grappling with the challenges of maintaining healthy credit scores in the wake of rising financial pressures.
