More than 9mn US borrowers miss student loan payments as delinquencies rise

More than 9mn US student loan holders have missed at least one payment this year, as delinquencies in the $1.7tn market soar following the end of the Biden administration’s post-pandemic payments holiday.

The government’s Financial Stability Oversight Council said this week that student loans were “a notable exception” to low default rates on other loans held by American households.

While defaults on student loans have been historically higher than those for other forms of consumer credit, the share of balances now more than 30 days past their due date had doubled since the payments holiday began in early 2020, the FSOC said.

The rise in delinquencies comes amid broader concerns that recent graduates are struggling to find work in a US labour market that has cooled over recent quarters.

“They just don’t have the money,” said Charlie Wise, senior vice-president and head of global research and consulting at credit bureau TransUnion. “That speaks more broadly to some of the weaknesses that we’ve seen in the jobs market for recent grads.”

A TransUnion poll over the summer of 196 respondents who were missing payments found almost half said they could not afford them, while a quarter said they were waiting for more information about forgiveness.

The credit bureau’s data shows the median monthly payment on a student loan is roughly $200 a month.

While the FSOC did not specify the scale of the balances in default, New York Fed data for the third quarter published last month found that 9.6 per cent of the $1.65tn of US student debt was more than 90 days past due. That is down slightly from the second quarter but a leap from the 0.5 per cent a year ago.

“Over 9mn student loan borrowers have transitioned to delinquency since credit reporting resumed,” the FSOC said, adding that delinquencies had “driven steep declines in credit scores”.

A lower credit score makes it significantly harder to secure the financing needed to fund big purchases, such as auto loans and mortgages.

The FSOC quoted VantageScore figures showing an average drop of 100 points, taking a borrower who fell into student loan delinquency this year from near-prime status above 600 to below 550, or subprime.

While a third of the 9mn borrowers had now returned to current status, the FSOC annual report noted that “adverse credit impacts can persist long-term, increasing borrowers’ costs for other credit lines and limiting their access to new loans”.

A New York Federal Reserve blog post published in May found that borrowers formerly considered prime or super prime, with a credit score above 720, had seen their credit score dip by an average of 177 points.

Most of those — 56.6 per cent — who were “newly delinquent” had a credit score below 620, losing an average of 74 points and taking them below the “near prime” category, the New York Fed said.

“You’re talking about a swath of individuals that are going to be closed out on getting credit at a time when overall credit conditions are still pretty easy,” said Diane Swonk, chief economist at KPMG US. “It inhibits the ability to get on the rungs of wealth building via home ownership, which are already challenged.”

Some blamed the initial rise on borrowers failing to realise that the repayments holiday had ended, but New York Fed figures and data from Equifax show rates have remained elevated into the third quarter.

The TransUnion poll, conducted in August, found that only 4 per cent of the 508 consumers surveyed were not aware of payments restarting. Just 16 per cent of those who had not paid said they did not realise payments had resumed.

Federal student loans were placed into forbearance and payments were paused in March 2020 under the Trump administration, and this pause was later extended by the Biden administration. While payments resumed in October 2023, late payments only counted towards delinquency from September 2024.

While Wise said the payments holiday was “very necessary” at the time, there had also been an “unwillingness to restart the payment engine”.

“They pushed it off and pushed it off and pushed it off,” he said.

Swonk said: “We overshot the stimulus during the pandemic.

“There was a reason we did it, but there was an echo effect and this is one of many.”

This article has been corrected to make clear that federal student loans were first placed into forbearance and payments paused in March 2020 under the Trump administration, not the Biden administration as originally stated.