Millions of Americans saw their credit scores sink when student loan collection resumed, jeopardizing future mortgage eligibility.
About 5.3 million Americans could face much lower credit scores due to federal student loans in default, according to the Associated Press.
Lower credit could make it hard or impossible for many people to buy a home.
The Federal Reserve Bank of New York explains why credit is falling suddenly: "Payments on federal student loans were paused for forty-three months, beginning at the start of the pandemic in 2020 and lasting through September 2023. During this time, the delinquency rate on student loans fell to less than 1 percent. After the resumption of payments, a one-year on-ramp was instituted, which prevented negative remarks of missed payments from being reported to credit bureaus. That on-ramp expired in October 2024, and delinquencies began appearing on credit reports during the first quarter of 2025."
Credit Scores Falling Well Over 100 Points In Some Cases
Using NY Fed data, ABC news reports that " ... in the first three months of 2025, 2.2 million student loan recipients saw their scores drop by 100 points, and an additional 1 million had drops of 150 points or more."
The higher borrowers' existing credit scores are, the greater the damage to their credit reports. Among those affected, the 3.2 million borrowers with a sub-620 score took an average hit of 74 points. But the 2 million with a score in the 620-719 range saw theirs fall by 140 points on average. And the 400,000 with scores of 720 or higher could expect theirs to tumble by 177.
And this isn't just affecting the young. In fact, those aged 18-29 years have the lowest rates of default, according to the NY Fed. But more than one-in-four aged 40 or older with current student loans are in default. That includes a quarter of those 60 or over.
Meanwhile, there is a strong geographical correlation. Southern states have the highest default rates: Mississippi (44.6 percent), Alabama (34.1 percent), West Virginia (34.0 percent), Kentucky (33.6%), Oklahoma (33.6%), Arkansas (33.5 %), and Louisiana (31.8%). By contrast, the rate in Illinois was 13.7%.
How Will This Affect Housing Markets?
It seems inevitable that a huge number of borrowers who would previously have been eligible for a mortgage will now find their lower scores disqualify them. And those who can still get one are likely to pay a considerably higher mortgage rate than they could get at the end of 2024.
That's a direct hit to their credit scores, but it may also affect their debt-to-income ratios (DTIs). If the applicant's wages are being garnished, that leaves them with less disposable income for their mortgage payments. Lenders can't qualify an applicant if their DTI is above lending standards.
It's too early to tell whether states with the highest student loan default rates will see a drop in housing demand. Statistically, there are too many variables to draw a straight line. But with that many homebuying-age individuals removed from the market, it's not hard to imagine an impact.
What to do if you're affected
The Associated Press suggests some ways forward.
You may be able to apply to:
- Enroll in an income-driven repayment plan
- Enroll in the SAVE plan
- Consolidate your federal student loans
- The Public Service Loan Forgiveness program
- The Debt Resolution Federal Student Aid website
Be aware that loan servicers (companies that manage student debt accounts) are struggling to cope with a tidal wave of new enquiries. So, be prepared for slow websites and for long holds if you try to call.
If all else fails, you can begin the slow process of rebuilding your credit. Begin by reading, "I'm a Loan Officer. Here's How To Improve Your Credit Score Before Buying a House." It should tell you all you need to know.
Wrecked credit scores are a serious blow. But you can repair yours over time.
