After about five years of vacation, student loan borrowers will see their credit score again if payments are behind their credit score. This could be bad news for borrowers and the economy as a whole, economists say.
A report from the Federal Reserve Bank of New York found that student loans were illegal interest rates less than 1% in the fourth quarter of 2024, reaching nearly 8% in the first quarter of this year as the suspension of reported defaulted loans ended. This has made some credit scores a free decline, which makes it harder for borrowers to obtain affordable loans or make large-scale purchases.
The Federal Reserve Bank of New York said credit scores for more than 2.2 million new student loan borrowers fell by more than 100. Scores over 1 million fell by at least 150 points.
"We may see millions of borrowers who have the potential to be locked in the regular mortgage market. They can see the cost of auto loans tripled and they have a hard time finding rental housing," said Aissa Canchola Bañez. "Direct damage, but also long-term harm, just huge harm."
The federal government’s pandemic student loan payments were cancelled in September 2023, but payments can be reported to the credit bureau until the fall of 2024 at least 90 days before due. These illegal acts began to appear in credit reports in 2025.
According to the Federal Reserve Bank of New York, one in four student loan borrowers who need to pay fell behind loans as of the first quarter.
Beth Akers, a higher education economics at the conservative think tank American Enterprise College, said the confusion surrounding a reboot of loan payments could drive most of it.
The pause that began under President Donald Trump's first administration has been extended several times by Joe Biden. Meanwhile, online rumors say all student loans have been permanently cancelled under Biden’s leadership. Biden did try to forgive $400 billion in student debt, but the plan ended up being hit by the Supreme Court.
"For a long time, I think borrowers think their loans have been cancelled. Or they never have to repay them. And I don't blame anyone for believing it," Ax said. "We're really confused about borrowers."
Other borrowers may not be financially prepared to repay the loan, especially after the monthly payment habits.
“The economy is very different from the former interest,” said Betsy Mayotte, president of the Plymouth, Massachusetts-based nonprofit. “Things like housing, eggs and lettuce cost a lot more than they did before Covid. So, payments that might be affordable in 2020 may not work now.”
A paper co-written by Michael Dinerstein, associate professor of economics at Duke University in North Carolina found that student loan pauses allow borrowers to take on other forms of debt, such as mortgages, credit card loans and auto loans. Now, these borrowers are also hanging on student loan payments, which can cost hundreds (or even thousands) a month.
Another possible factor? Kristin Blagg, a leading research assistant at the Washington, D.C. Department of Urban Research, said the surge this year could be associated with the influx of late payments that will be spread out without pauses over the years.
"On average, about 1 million people go into defaults in an average of one year," Prague said. "What we have is that students who have been in nearly five years have not reached that default period. So you can think of it as almost a group of people who defaulted during that time and they just got to that point."
In the first quarter of 2025, about 5.6 million borrowers were considered new defaults. The Federal Reserve Bank of New York estimates that more than 9 million student loan borrowers will face significant credit scores by the end of June.
Reese Wallace, 34, of Oakland, California, watched his credit score from 700 to 488 above this year after he stopped paying for student loans.
Wallace graduated from the California Institute of Arts in 2023 and left the school with a student debt of about $50,000. Wallace said the payment was nearly $500, which was untenable on the salary of a studio artist in the Bay Area.
Wallace said he quit his loan last year to put the money into graduate school application because his loan will automatically be postponed when he applies. He realized that when he applied for student housing at the University of Nevada Las Vegas, he was denied due to his low credit score.
The credit score brings a wrench for Wallace’s plan to move to graduate school. He has to get a co-signer’s housing, and he fears he will be unable to bear the car after traveling with public transportation in California.
"What kind of vehicle can I get with a 488 credit score?" he asked. “To be honest, it will be very, very difficult.”
Akers believes it is fair to taxpayers to resume student loan payments, but when credit scores take a hit, there can be a "severe trick stream", especially because baseline rates are already high.
“People quickly consider funding money for new homes at affordable rates,” she said. “But employers sometimes look at credit scores. When you rent a house, they look at your credit score.”
If the borrower continues to miss the payment, they may find themselves in more hot water. After 270 days, the government can seize wages, tax returns or social security benefits. The Federal Office of Student Aid is expected to issue notices on salary decoration this summer.
Student Loan Default: The Fed said benefits could be retained from 5.3 million student loan borrowers who defaulted.
Economists warn that restarting payments and sunken credit scores could bring another blow to an economy that has shown signs of a slowdown this year.
"This is another potential resistance," Prague said. "We don't have a good idea of how big it is compared to all the other things that are happening right now, but whenever there is a dollar spending a dollar on a loan, it's a dollar, which is a dollar that isn't invested in the economy or saved for big purchases."
Morgan Stanley economists estimate that the increase in loan payments this year could drop by as much as 0.15 percentage points as payments increased by $1 billion, or $3 billion a month. Their May 5 report said GDP impact was “relatively small” but described it as “another headwind” for consumers.
Canchola Bañez from the Student Borrower Protection Center shared advice for borrowers who are under loan owing:
Borrowers should explore repayment options on sudentaid.gov. Canchola Bañez said income-driven repayment plans might be their best choice. This shift may take time; according to the Department of Education, there is a backlog of about 2 million federal student loan borrowers, requiring income as repayment plans. Borrowers may endure their patience when applying for processing, meaning they do not have to make a loan payment while waiting for approval of a more affordable payment plan.
If the borrower's loan is more than 270 days behind, the education department proposes three options to get rid of the default:
Repay the loan in full (not practical for most borrowers).
Research loan recovery. Borrowers may contact the loan holder and agree in writing to make nine affordable monthly payments within 20 days of the set maturity date, all for 10 consecutive months.
Explore loan mergers. Borrowers agree to repay the new “direct merger loan” under the income-driven repayment program, or three consecutive voluntary and monthly payments on time before the default loan merger. Although this option is faster, accrued interest is added to the principal balance, which may make the borrower pay more overall.
This article originally appeared in USA Today: Credit Rating: Crashed after Resuming Student Loan Payments nationwide