As federal student loan repayments resumed after the COVID-era pause, many borrowers are facing unexpected drops in their credit scores, the Federal Reserve Bank warns. A 12-month moratorium on reporting student loan defaults to credit bureaus — a Biden administration initiative — quietly ended on January 1, 2025, leaving millions unaware that their loans were now being reported as overdue.
The confusion surrounding loan statuses, compounded by political and legal battles over student debt relief programs, has made it challenging for borrowers to keep track of their repayment responsibilities. Experts are urging borrowers to take immediate action to avoid damage to their credit scores.
Loan Default Reporting Resumes, Impacting Credit Scores
According to a Federal Reserve Bank study, a larger share of student loan balances became overdue after the moratorium ended than before the pandemic-induced repayment pause began. This increase in “shadow delinquencies” could lead to significant credit score drops for millions of borrowers once delinquency reports start appearing in the first quarter of 2025.
“We estimate that more than nine million student loan borrowers will experience significant credit score declines as overdue loans begin showing up on credit reports in 2025,” the report stated.
Confusion and Legal Setbacks Worsen the Situation
The Biden administration’s efforts to forgive student debt have largely been derailed by legal challenges, leaving borrowers in limbo. The confusion surrounding repayment plans has been exacerbated by court decisions limiting options like the SAVE program, which was intended to make student loan repayments more manageable.
Additionally, the Trump administration’s efforts to dismantle the Department of Education and reduce staffing have further complicated matters. With key personnel laid off, and the department shifting responsibilities to other agencies, communication with borrowers has suffered, according to experts.
Michele Zampini, senior director of college affordability at The Institute for College Access & Success, emphasized the detrimental impact of political polarization on student loan repayment systems. “The breakdown of communication, coupled with legal battles, has made it increasingly difficult for borrowers to navigate their loan repayment options.”
Proactive Steps Needed to Protect Credit
To avoid credit score damage, borrowers who have not resumed payments must check their student aid account, review emails, and ensure that their loan servicer has accurate contact information. Jack Wallace, director of governmental and lender relations at Yrefy, a company specializing in loan solutions, advises borrowers to stay proactive in repaying their loans.
“People need to be persistent about repaying their federal student loans. You cannot ignore it anymore, as it will negatively affect your credit score,” Wallace stressed.
Political and Systemic Challenges for Borrowers
The political pushback against student debt relief, particularly the cancellation of portions of federal loans, has resulted in a fragmented and confusing repayment landscape. With legal challenges to Biden’s debt forgiveness plan still ongoing, many borrowers are unsure of how to proceed.
Moreover, complications arising from the transition of the Education Department’s loan management to other agencies have left borrowers struggling to access payment information and repayment options. Zampini noted that many borrowers are unable to reach customer service or get accurate information about their monthly payments due to understaffing and bureaucratic delays.
Economic Impact of Credit Score Declines
As loan repayment reporting resumes, borrowers with overdue student loans will likely see their credit scores fall. This could significantly hinder their ability to secure loans for major purchases, such as homes or cars. Wallace warns that the “inflated” credit scores many Americans enjoyed during the pandemic due to stimulus payments and paused loan repayments are now set to drop, triggering a ripple effect on individuals’ financial lives.
Future Challenges: Proposed Cuts and Continuing Legal Uncertainty
In addition to the immediate concerns about credit score impacts, the ongoing political battle over federal student loan programs presents further challenges. House Republicans are working on a spending bill that includes proposals to cut student loan programs in an effort to reduce federal spending. These cuts could reduce benefits for borrowers and increase their monthly payments, exacerbating financial strain.
As the political landscape continues to evolve, experts urge borrowers to stay informed and proactive to mitigate the potential financial fallout from ongoing changes to student loan policies.
