Daniel Mangrum and Crystal Wang discussed the effects of pandemic-related policy actions on student loan balances, repayment rates, and delinquent loans. This article focuses on how these changes influenced the credit scores of student loan borrowers and anticipates the impact of resuming negative reporting of overdue balances on borrowers’ credit standings.
The pandemic forbearance significantly improved credit scores for delinquent and defaulted borrowers. The median credit score for student loan borrowers increased by 11 points from the end of 2019 to the end of 2020. Borrowers with previous delinquencies experienced particularly large increases. For instance, the median score for previously delinquent but not defaulted borrowers jumped by 74 points from 501 to 575 between 2019:Q4 and 2020:Q4.
The Fresh Start program in the fourth quarter of 2022 marked all defaulted loans as current, increasing the median score for those with a default in 2019 by 44 points, from 564 in 2022:Q1 to 608 in 2023:Q1. By the end of 2024, borrowers with loans in delinquency or default saw scores that were 103 and 72 points higher, respectively, than at the end of 2019.
The shadow delinquency rate, estimated by summing the total volume of loans not owned by the federal government that were 30 or more days past due, reached a high of 15.6 percent by the end of the on-ramp period, with more than $250 billion in delinquent debt held by 9.7 million borrowers.
A new student loan delinquency can reduce credit scores by more than 150 points. Borrowers with superprime credit scores (760 or higher) before the delinquency saw average credit score declines of 171 points, while those with subprime credit scores (less than 620) saw average declines of 87 points.
Given these estimates, more than nine million student loan borrowers are expected to face substantial declines in credit standing over the first quarter of 2025. The aggregate impact on overall credit access will depend on the previous credit standing of those with past due loans.
— news from Liberty Street Economics –