Impact of Student Loan Defaults on Credit Scores

Micah Smith, CEO and financial influencer, shares insights on the severe financial implications of falling credit scores in a recent conversation.

A drop of 100 points on your credit score can be extremely damaging.

Matt Schulz, chief credit analyst at LendingTree, notes that recovering from such a setback can take years.

Last week, the Federal Reserve Bank of New York highlighted a notable decrease in credit scores, particularly as millions of student loan borrowers missed payments. This has raised concerns about their ability to secure new loans, mortgages, and credit cards.

In the first quarter of 2025, approx 2.2 million borrowers who fell behind on payments saw their scores plummet by over 100 points, with more than a million experiencing declines of at least 150 points.

Schulz addresses that bouncing back from a credit score drop isn’t an overnight task; it’s more like a marathon.

Defaulting Borrowers and Debt Collections

Interestingly, more than half of those newly delinquent borrowers already had subprime credit scores. This, perhaps, means their delinquency may not drastically affect future credit approvals since they likely wouldn’t have qualified for new credit anyway.

However, those who had scores above 620 might have previously qualified for loans and credit cards but now face higher costs or outright rejections.

Initially, student loan payments were paused during the pandemic to alleviate financial pressure. This suspension continued until September 2023, followed by a one-year grace period that protected borrowers from having missed payments reported. As that period concluded in October 2024, delinquencies finally started appearing in credit reports.

Why Credit Scores Are Declining in the US

Once the grace period lapsed, many individuals fell behind, after maintaining clean records for over 90 days.

According to Schulz, the drop in credit scores could result in consumers facing higher premiums or challenges when renting apartments.

It may also hinder access to 0% balance transfer offers.

Over time, these issues could lead to significant costs—potentially tens of thousands of dollars due to increased interest rates and fees. Sadly, many Americans may have to learn this hard lesson.

Strategies for Recovery

Recovering from this kind of setback will be a long-term endeavor. Schulz emphasizes the importance of ensuring your credit report is free from errors, as inaccuracies can unduly lower scores.

He mentions that such errors are more common than people realize, and correcting them can substantially boost scores.

Another approach could be to enhance credit utilization by requesting more credit but not using it. That said, Schulz acknowledges that gaining trust in light of recent delinquencies could be challenging.

Moreover, becoming an authorized user on someone else’s credit card can positively impact your credit score. However, Schulz points out that the primary account holder remains responsible for the payment.

He adds that properly managed, this strategy can significantly enhance a user’s credit history, which is a tactic often employed by parents for their college-aged children.

In the end, patience and consistent positive action will be crucial for recovery.