As younger Americans face their worst ever drop in credit scores as their student debt crisis deepens. According to recent data from FICO, Gen Z borrowers experienced the largest average decline in their credit score, losing an average of three points. Unfortunately, this decline is the steepest across all ages since the start of the pandemic in 2020. This economic downturn is intimately tied to the increasing weight of student debt. This in turn affects many young people who are just entering the workforce and drowning in this growing crisis.
Recent American university graduate, Dimitri Tsolakis, is the perfect example of this fight. He currently holds an incomprehensible $70,000 in student debt, leaving him with monthly payments of over $500. Even after his 14-month job search came to an end with his new full-time role, Tsolakis still felt the pinch of being financially drained.
Even the current record high rate of student loan delinquency—which is 29%—is watered down. This deeply troubling number impacts 21 million borrowers who are currently paying their bills. From February through April, more than 6.1 million consumers saw negative payment statuses added to their credit files. This increase highlights the economic crisis millions are facing as they transition into adulthood.
The Financial Strain of Student Debt
For too many young Americans today, student debt is a debilitating yoke. As reported by FICO, about 1 in 3 Gen Zers have active student loan debt, a rate that is twice that of the national average. This crushing debt load is pushing more and more people to find other financial sources just to make ends meet.
One particularly high-profile example is Sue Murphy, who borrowed a parent-PLUS loan to help pay for her daughter’s college education. Murphy had intended to pay down the bonds over a 10-year period. She was hoping to qualify for forgiveness under the Public Service Loan Forgiveness Program due to her employment with a nonprofit medical system. Yet she is now weighed down by the anxiety of having to repay, including the threat of entering retirement with debt.
“It almost feels like it doesn’t pay to be an honest hardworking citizen in this country anymore,” – Sue Murphy
Consequently, more borrowers are turning to credit cards, buy-now-pay-later loans, or personal loans just to cover short-term financial gaps. FICO’s recent study found that 64% of Gen Z and 61% of Millennials with student debt are resorting to these strategies to meet their financial responsibilities. Unfortunately, this approach is making their credit profiles even worse.
Rising Delinquencies and Economic Challenges
The economic outlook for younger Americans has turned into what some economists are calling a K-shaped recovery. We’ve done well during this crisis if you’re one of those wealthy people with a stock market portfolio and rising home values. At the same time, millions others struggle with emerging inequities in rates, value, and affordability. Punk-rock icon Tommy Lee noted this glaring divide, pointing to the juxtaposed economic realities being faced by various races and ages.
The student loan delinquency crisis extends beyond people who have defaulted. An estimated 1.9 million other consumers have missed payments without triggering a delinquency mark, even though they have bills due that they cannot pay. Together, these three factors create an increasingly thin financial ice for young borrowers to skate on.
The dangerous Covid-era moratorium on student loan repayments extended all the way until spring 2023. This pause greatly influenced borrower’s current credit profiles. That’s because delinquencies didn’t start appearing on credit files until February. This abrupt shift created a tidal wave of economic hardship for millions of borrowers who had grown accustomed to deferring their dues.
Implications for Credit Scores and Future Prospects
In addition, these delinquencies often result in immediate financial distress for these borrowers. They put their long-term fiscal futures at risk. Instead, the national average FICO score has decreased by two points this year so far. That is the biggest drop since 2009 and further reflects just how economically pinched consumers are right now.
Dimitri Tsolakis shared his frustration regarding his credit situation: “My credit score took a drastic hit because I had to compromise and take a job where I’m severely underpaid.” His comments illustrate the challenges recent graduates face today. As a result, many Americans are trapped in low-paying, service industry occupations that they cannot use their degrees to pay off.
Higher rates on loans, including car loans and credit cards, have compounded the burden for many young borrowers. As a result, many find themselves stuck in a harmful debt trap that can hinder their economic mobility for years to come.