End of student-loan 'on-ramp' means missed payments can hurt borrowers. Here's how to protect your credit score.

Andrew Keshner

The Education Department's 'on-ramp' grace period for student-loan borrowers is ending. Now the clock starts.

One year after the pause on student-loan payments ended, Uncle Sam is getting ready to tell credit-reporting companies which borrowers are falling behind on their payments.

There's no good time to get knocked on a credit score - but today's economic environment is a tough backdrop.

Though interest rates are starting to fall on mortgages, car loans and credit cards, student-loan borrowers could miss out on that trend - and those savings - if lenders start seeing a declining credit score. The dings from negative information could start turning up on reports by early next year, experts say.

As student-loan servicers start relaying information about missed, late and partial student-loan payments to credit-reporting companies like TransUnion (TRU), Equifax (EFX) and Experian (EXPGY), a falling credit score has a steeper cost than it did before, said financial coach Monique White, the head of community at Self Financial, a credit-building platform.

"Credit can be unforgiving, and it can take a while to build up your score," she said.

Exactly when missed student-loan payments start affecting your credit report

Monthly student-loan payments began coming due last October, after President Joe Biden's administration ended a freeze on payments that started in the pandemic's early days. But if people didn't make those payments, loan servicers didn't relay the negative information during the Education Department's one-year "on-ramp period."

The idea was to shield borrowers "from the worst consequences of missed, late, or partial payments, including negative credit reporting for delinquent payments," the department said.

Almost 18 million borrowers, about 40% of them, were up to date on their payments as of January, according to a report from a federal-government watchdog. But at the same time, nearly 10 million borrowers - almost 30% - were past due on their payments, the report said.

In the past several months, TransUnion data showed just over half of people with student-loan obligations made those payments, said Liz Pagel, senior vice president of consumer lending at the credit-reporting agency. That's not necessarily proof of inability to pay, she said. Some people could've been waiting for the possibility of the Biden administration canceling their debt. Or they could have been skipping payments because they understood there were no credit-score consequences - yet.

From the archives (April 2024): What is a good credit score - and how can you improve yours?

Though credit cards, mortgages and other consumer loans traditionally report a missed payment 30 days after the due date, Pagel said, student-loan servicers tell the credit bureaus 90 days later.

So suppose a student-loan payment is due Oct. 15. That means Jan. 15 would be the earliest a servicer would relay the information to credit-reporting companies, said Scott Buchanan, the executive director of the Student Loan Servicing Alliance, a trade group.

Servicers typically relay their monthly reports to the credit bureaus at the end of the month, or on the early side of the next month, Buchanan noted.

Until now, the servicers have been reporting all borrowers as current, he said. Going forward, if a borrower goes into a repayment plan or certain loan consolidations after the due date but before the 90-day mark, there would be no reporting of a missed payment, Buchanan said. If someone takes this step after the 90-day point, he said, servicers can retroactively remove the missed-payment information from their reports to the credit bureaus.

Of course, the borrower would have that ding on their credit file until the update, he noted.

Buchanan would advise borrowers worried about upcoming payments and credit-score consequences to act early. "If we get everybody in January calling, there's going to be a crush of demand to talk to people and get assistance," he told MarketWatch.

The credit-score consequences of delinquency vary based on what else is happening for a consumer, Pagel said. These have "less impact over time," she added, and will "completely fall off of the consumer's credit report and will have no impact" after seven years.

How late student-loan payments affect a borrower's credit score

For student-loan borrowers, late payments could produce dings and defaults could dent credit scores, according to some estimates.

Depending on a person's credit history, the report of a default on student loans could sap an average of 49 to 82 points from a credit score, said Rikard Bandebo, the chief economist at VantageScore, a credit-scoring company owned by TransUnion, Equifax and Experian. Those estimates assume everything else is the same on a person's credit file, he noted.

Meanwhile, consistent on-time payments would ultimately add an average of three to eight points, depending on a person's credit history.

Americans' average credit score was 702 in August and has remained constant for months, according to VantageScore, whose scoring ranges from 300 to 850.

It's the least-risky borrowers who would face the biggest credit-score subtractions, he said. "Like reputations, credit scores take a long time to pick up, but fall down very quickly," he said. The likelihood of borrowers with the least default risk becoming unable to make payments is very low, he noted.

The question is the extent to which borrowers will miss or fall behind on their payments once credit reporting resumes, Bandebo said. "That's the magic thing people are trying to figure out."

Declines in credit scores may lag borrowers' missed payments, but they would be happening against a backdrop of easing interest rates after the Federal Reserve began cutting its benchmark rate this month. Even before the Fed's initial half-percentage-point rate cut on Sept. 18, the difference in costs for a personal loan illustrated the price of having a lower credit score.

For a person with a score of at least 720, a $10,000 loan repaid in five years could have an average 20% annual percentage rate, according to Credit Karma data through the end of August. The borrower would pay $253 a month and more than $5,000 in interest over the life of the loan.

Someone with a subprime score between 600 and 659, meanwhile, would have a 28% annual percentage rate on that same loan - paying $299 a month and almost $7,900 in interest over the loan's duration, the analysis showed.

The credit-reporting restart on student loans is happening as overall loan delinquencies for younger borrowers in the Gen Z and millennial generations are already higher than the overall average, Bandebo said.

For past-due borrowers in these demographics, "it's just another knock on them, which is a shame because they are in the most precarious situation."

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-Andrew Keshner

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09-30-24 1410ET

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