Federal student loan repayment confusion sparks nationwide credit score concerns
If you have not been paying off your loan, or think your loan is paused, check your student aid account.
Thousands of Americans with federal student loans who did not resume payments after COVID-19-era loan repayment pauses ended a year and a half ago could now see their credit scores hurt, the Federal Reserve Bank says.
That's because a 12-month moratorium on reporting loan defaults to credit bureaus − a Biden-era "on-ramp" to protect borrowers − quietly closed on Jan 1.
Borrowers, caught in the confusion of political and legal blowback to Democratic proposals to ease student debt burdens and payment programs, are unlikely to be aware that reporting to credit bureaus resumed after the poorly publicized Jan. 1 deadline, experts say.
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If you have not been paying off your loan or think your loan is paused, check your student aid account, including emails and snail mail from loan servicers, said Jack Wallace, director of governmental and lender relations at Yrefy, a private company that specializes in solutions for borrowers who are delinquent.
It's crucial that borrowers begin to repay federal student loans, if they have not already started, to protect their credit standing.
"People need to be persistent about repaying their federal student loans," Wallace said. "You cannot ignore it anymore because it's going to negatively impact your credit score."
Past-due balances will hurt credit scores
A larger share of student loan balances was past due after the on-ramp window closed on Jan. 1 than before the pandemic-era pause on repayment, said a study published by the Federal Reserve Bank. These "shadow delinquencies" will have an impact on credit scores once reports start rolling in after the first quarter of 2025, the study said.
"We estimate that more than nine million student loan borrowers will face significant drops in credit score once delinquencies appear on credit reports in the first half of 2025," the report said.
Biden-era loan forgiveness has mostly been derailed by legal injunctions and court orders that held many of its proposals unconstitutional. Credit reporting has resumed.
Add to that recent confusion over the status of loans, along with a lack of communication from the Education Department as the Trump administration moves to eliminate it by laying off staff and shunting its student loan arm to a different agency, and borrowers need to be proactive, experts say.
The fallout from an extremely politicized atmosphere made these borrowers even more vulnerable because of poor or confusing communication from the government, said Michele Zampini, senior director of college affordability at The Institute for College Access & Success, a think tank in Washington.
Borrowers have grown confused
All this confusion increases the likelihood of payments not being made on time, simply because borrowers did not or could not keep track of what they owe every month, Zampini said.
"There's been so many shifts and so much chaos and so much confusion," she said. "And there has been a lack of information. Many borrowers don't know what their monthly payment is because of these injunctions and transitions.
"I would say the political blowback to the student debt relief efforts has been the thing that has really created this extreme breakdown."
On top of that, the Education Department's loan portfolio is "an extremely complicated, complex system − there's a lot of people that have a lot of specialized knowledge to manage it who have been fired," she said.
The pandemic-era pauses to repaying loans and the disruptions that followed have left borrowers confused. First, the Supreme Court struck down the Biden plan to erase $10,000 in federal student loans and $20,000 for low-income recipients of the Pell Grant, a one-time measure introduced when loan repayments were paused during the pandemic.
Then came legal challenges from Republican states to Biden's SAVE program, which was designed to work as a borrower-friendly payment plan. Some parts of it have been chipped away by court decisions. A ruling from an appeals court last month has left the SAVE Plan's future in question.
Just over 8 million SAVE Plan borrowers who enrolled before the program was blocked in the courts remain in an interest-free forbearance during which no monthly payments are due and no interest accrues, the Department of Education website says.
"You will be in this forbearance until servicers are able to accurately calculate monthly payment amounts or the court reaches a decision on the availability of the SAVE Plan," the site says. "This timeline will give borrowers the opportunity to make another choice for repayment, based on which of the updated options is best for them. Borrowers will be informed of any further change to this litigation-related forbearance."
'System has broken down'
The Biden administration did not gauge the political resistance to its ambitious student debt relief proposals, many of which were blocked in the courts. In the end, it is borrowers who have suffered, Zampini said.
"The system has broken down to the point where people are not able to access their account, access their payment information, access an application for their plan," she said. "They can't get through to the customer service line to work through these options. There's hours and hours of wait times."
Add to that the Trump administration's reduction of Education Department staff by half and its plan to move the loan portfolio to the Small Business Administration.
Dismantling the Education Department puts "important functions at risk, threatening to deny students access to the financial support they need to obtain a degree that will open doors to greater economic mobility and career opportunities," said Margo Chaly, executive director of New Jersey's Higher Education Student Assistance Authority.
The state agency "urges the federal government to maintain the services so many students depend upon," Chaly said.
Inflated credit scores from COVID stimulus money
"It’s a two-part storm that’s blowing," said Wallace, of Yrefy. "We saw artificially inflated credit scores go up during COVID because of stimulus payments and because people were not having to make payments on federal loans and they were not accruing debt.
"What was a macroeconomic issue for the last couple years, now with reporting to the credit bureaus that's starting any day now, it is a microeconomic issue. It's a two-part storm coming: from a deficit standpoint and from an economy and individual/family standpoint. When credit scores tank, it diminishes their ability to buy a car or a house or get a credit card."
The changes come as House Republicans work on a spending bill that seeks to bring about a reduction in trillions of dollars in spending in the federal budget. A draft bill will not be ready until April or May, but current proposals are targeting cuts in student loan programs to help support top-line priorities of the Trump administration. Those proposals, as they stand, could hurt borrowers by reducing benefits and increasing monthly payments, Zampini said.