Student Loans Are Back—and They’re Taking Credit Scores Down With Them
Millions of Americans just got a financial gut punch. Here’s why it’s happening—and what they can do about it.
After a five-year break, federal student loan payments have returned. And along with them? A brutal wave of credit score damage that’s hitting borrowers hard—and fast.
According to new data from the Federal Reserve Bank of New York, student loan delinquencies (payments over 90 days late) shot up from less than 1% in late 2024 to nearly 8% in early 2025. More than 2.2 million borrowers have watched their credit scores drop by over 100 points, and over 1 million saw losses of 150 points or more.
This isn’t just a paperwork problem - it’s a financial disaster with real-world consequences.
“We could see millions locked out of the housing market, hit with higher car loan rates, or denied rental homes,” warns Aissa Canchola Bañez, policy director at the Student Borrower Protection Center. “The harm, both now and later, is massive.”
Why Are So Many People Falling Behind?
Here’s a quick rundown of what caused this mess:
The Pause Ended: The pandemic-era payment freeze ended in September 2023, but credit reporting didn’t resume until late 2024. That delay meant borrowers were suddenly hit in 2025 with the full force of missed-payment reporting.
Confusion Was Everywhere: Some borrowers believed their loans were forgiven. That’s partly because President Biden proposed a $400 billion cancellation plan—but the Supreme Court struck it down.
Life Got More Expensive: Rent, groceries, gas, and basic goods have all gone up in price. What was affordable in 2020 might feel impossible now.
Debt Piled Up: Many borrowers used the break to take on new loans—cars, credit cards, even mortgages. Now, they’re facing all of it at once.
The Default Backlog Hit: Usually, about 1 million borrowers default each year. With the pause, defaults were delayed—now they're hitting all at once.
It’s Not Just Personal — It’s Economic
What happens when millions of people suddenly have to come up with hundreds—or even thousands—of dollars each month just to stay current on their student loans?
It doesn’t just affect individuals. It affects the entire economy.
When people have less disposable income, they stop spending money on things that drive economic growth: shopping, dining out, booking vacations, upgrading appliances, or putting down payments on homes and cars. And when consumers stop spending, businesses feel the pinch. Sales drop. Hiring slows. Investment gets postponed. The effects ripple outward.
Morgan Stanley economists estimate that the return of student loan payments could cut real GDP growth by up to 0.15% this year. That number may sound small in isolation, but in a fragile economy already facing high interest rates, credit card debt at record highs, and cooling job growth, it's another weight on the scale—a headwind instead of a tailwind.
“Every dollar spent on student loans is a dollar not going toward groceries, travel, or saving for the future,” said Kristin Blagg of the Urban Institute.
And it’s not just spending on fun or luxuries. It’s also major financial milestones. People are delaying home purchases, postponing family planning, or avoiding starting small businesses—all because their monthly budgets just got tighter.
When that many people pull back at once, it slows down the economic engine that powers everything from local coffee shops to the housing market.
Even industries that aren't directly tied to education—like real estate, auto sales, and hospitality—can feel the squeeze.
Imagine this: 44 million borrowers each spend $300 less a month. That’s over $13 billion per month being siphoned away from the rest of the economy.
That’s why economists are watching this moment closely. Because what started as a personal finance story is quickly becoming a national one
What Borrowers Can Do Right Now
Here’s what struggling borrowers should know:
Visit StudentAid.gov: Apply for an Income-Driven Repayment (IDR) plan. This can reduce your monthly payment based on your income.
Behind by more than 270 days? You still have options:
Loan Rehabilitation: Make 9 affordable payments in 10 months. This can get your loan out of default and remove the record from your credit report.
Loan Consolidation: Combine your federal loans and start fresh on a new plan. Be aware: interest may capitalize.
Forbearance: While waiting for your IDR plan to be approved, you may qualify to pause payments.
Heads up: The government can start garnishing wages, tax refunds, and Social Security after 270 days of missed payments. Letters about wage garnishment could go out as soon as this summer.
Final Thought
The return of student loan payments is more than just a restart—it’s a shock to the system. Borrowers didn’t just fall behind; they were set up to fail by years of mixed signals, rising costs, and a system that didn’t prepare them for the restart.
And now? They're paying the price - in credit score points, lost opportunities, and future financial strain.
If you or someone you know is in this boat, take action. Explore your options. Ask questions. Share this post. There are paths forward - but the clock is ticking.
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