Student Loan Delinquencies Soar as Collections Resume
The financial well-being of student loan borrowers is facing renewed challenges as delinquency rates surge and the Department of Education (ED) reinstates involuntary collections on defaulted debt. A recent report from TransUnion reveals a concerning trend: a record-high 20.5% of student loan borrowers are classified as seriously delinquent, defined as being 90 or more days overdue on their payments. This alarming statistic, recorded through February, paints a grim picture compared to the pre-pandemic level of 11.5% in February 2020.
Michele Raneri, vice president and head of research at TransUnion, cautions that the 20.5% figure may even underestimate the true extent of the problem. She emphasizes that while over one in five student loan borrowers with a payment due are reported as seriously delinquent, the actual number could be significantly higher. This underscores the potential for a widespread financial strain among borrowers struggling to manage their student loan obligations.
The TransUnion report echoes earlier warnings from credit scoring company FICO, which also flagged a potential spike in student loan borrowers falling into serious delinquency. These delinquencies pose a significant threat to borrowers’ credit scores, potentially increasing the cost of future loans or limiting their borrowing capacity. As Joshua Trumbull, senior vice president and head of consumer lending at TransUnion, points out, "Consumers may find themselves shocked by the dramatic and immediate impact that a default can have on their credit scores." The consequences of falling behind on student loan payments can therefore be far-reaching, affecting various aspects of borrowers’ financial lives.
Student loan payments officially resumed in September 2023 after a lengthy pandemic-related pause. To ease the transition, borrowers were given a one-year "on-ramp," during which credit bureaus refrained from reporting nonpayment. This grace period provided a buffer for borrowers to adjust to the resumption of payments and avoid immediate damage to their credit scores. However, with the on-ramp period now concluded, the Education Department announced that it would resume collection activities, effective May 5. This reinstatement of collection efforts marks a turning point for many borrowers, particularly those who have struggled to keep up with their payments.
TransUnion’s data reveals the impact of the on-ramp’s conclusion. Consumers who had faced default since the end of the on-ramp saw their credit scores decline by an average of 63 points. This significant drop highlights the sensitivity of credit scores to missed payments and defaults, particularly after an extended period of forbearance. The impact on credit scores has been broad, with FICO reporting that the average score used by lenders to assess risk fell to 715 in the past year, down a point from January and two points from the previous year. This decline is attributed, in part, to the reporting of federal student loan delinquencies on credit files for the first time since March 2020.
Interestingly, the impact of serious delinquencies and defaults on credit scores varies depending on the borrower’s credit tier. TransUnion’s research shows that super prime, or top-tier, student borrowers tend to experience the most significant credit score hits when they become seriously delinquent or default. While a smaller percentage of super prime borrowers were seriously delinquent, those who did default saw a greater impact on their credit scores compared to borrowers in traditionally riskier credit tiers. This is largely because borrowers in higher credit risk tiers typically have fewer negative marks on their credit reports, making the addition of a defaulted account all the more damaging.
To illustrate the magnitude of the credit score impact, TransUnion estimates that a super prime borrower could see a 175-point credit score drop, while a prime borrower could suffer a 121-point decline. In contrast, subprime, or lowest-tier, borrowers might experience a 42-point decrease, and near-prime borrowers could see a 64-point decline. The difference in impact reflects the varying levels of creditworthiness and the relative significance of a default within each credit tier.
The potential for further increases in delinquencies is a pressing concern. Tommy Lee, a director at FICO, estimates that approximately 2.7 million student loan borrowers were already experiencing severe delinquencies in February. He projects that between March and April, more than 5 million additional severe delinquencies could be reported. This significant increase underscores the urgency of addressing the challenges faced by student loan borrowers and implementing effective strategies to prevent further defaults. The sheer volume of borrowers at risk highlights the potential for widespread financial hardship and the need for targeted support and resources.
The resumption of student loan payments, coupled with the end of the on-ramp period, has created a challenging environment for borrowers. The rise in delinquency rates and the potential for further increases underscore the need for proactive measures to help borrowers manage their debt and avoid default. These measures may include providing access to affordable repayment plans, offering financial counseling and education, and exploring alternative strategies for debt relief.
The information presented in this article is based on data from TransUnion and FICO and reported by Medora Lee, a money, markets, and personal finance reporter at USA TODAY. The findings highlight the ongoing challenges faced by student loan borrowers and the potential impact of delinquencies on their financial well-being. As the Department of Education resumes collection activities, it is crucial to monitor delinquency rates closely and implement strategies to support borrowers in navigating this complex landscape.
