In a significant financial turn, approximately 9.2 million student loan borrowers in the United States find themselves behind on payments as of October 2024. This marks the end of a relief period that expired on September 30, 2024, impacting 43% of the 22 million borrowers with payments due. As a consequence, these individuals face the risk of their credit scores plummeting by up to 129 points, potentially triggering a cascade of financial challenges.
The expiration of the relief period means that, for the first time since the pandemic, becoming past-due on student loan payments will once again adversely affect credit scores. Rikard Bandebo noted,
"For the first time in five years, federal student loan delinquencies will start to reappear on credit files."
This situation has significant implications as credit scores, which typically range from 300 to 850, play a crucial role in securing favorable borrowing terms. Borrowers with scores around 670 and higher are generally deemed to have good credit. However, those who fall behind may face increased borrowing costs across mortgages, car loans, and credit cards.
"Borrowers with past-due student loans and lower credit scores face higher borrowing costs across the board — from mortgages, car loans and credit cards," said Cathy Curtis.
Despite these challenges, struggling borrowers have several options to manage their payments. They can apply for income-driven repayment (IDR) plans that cap monthly bills at a percentage of discretionary income. However, these applications are currently unavailable as the Education Department ensures compliance with a new court order. For those who qualify, deferments or forbearances are also available, allowing payments to be paused for a year or more.
Moreover, consolidation might be a viable option for some borrowers. To consolidate, individuals must make three consecutive, voluntary, on-time, full monthly payments. Additionally, rehabilitation offers another path to remedy defaulted loans. The Education Department states,
"Rehabilitating involves making 'nine voluntary, reasonable and affordable monthly payments.'"
As borrowers navigate these options, it is crucial to consider the broader financial implications. Those who remain current on their payments may experience a modest boost in their credit scores by as much as eight points. Conversely, federal student loan borrowers who default may face wage garnishments starting this October.
It's important to note that many borrowers could find themselves with zero monthly payments under certain IDR plans. However, until applications resume, these borrowers must explore alternative measures to prevent further financial strain.
Borrowers are urged to assess their financial situations carefully and explore all available options to mitigate the impact of delinquencies on their credit scores and overall financial health.