New VantageScore® Research Shows Credit Score Impact of the End of Federal Student Loan Forbearance
Supreme Court Decision Striking Down Student Loan Forgiveness Program Will Also Result in Credit Score Declines for Borrowers Who Don't Resume Payments
VantageScore® has analyzed the credit score impact of the August 2023 end of federal student loan forbearance contained in the Fiscal Responsibility Act of 2023. The company's research indicates that a large percentage of nearly 40 million Americans who have not made payments on their federal student loans in the past three years will experience changes in their credit scores. Individuals who do not resume student loan payments will experience significant score declines, while those who resume payments will likely see their credit scores improve. The new Supreme Court decision rejecting the Biden administration's student loan forgiveness program means that many borrowers who were expecting a reduction or elimination of their student debt will now need to plan to resume their full payments.
The Fiscal Responsibility Act of 2023 officially ends the possibility of extending federal student loan forbearance. The extensions pausing student loan repayments since March 2020 are set to expire by August 31, 2023, with payments restarting on or around October 2023. Student loan borrowers in forbearance collectively owe almost $1.3 trillion in federal loans as of December 2022, according to the Department of Education.
VantageScore estimated the potential credit score impact of the end of student loan forbearance by analyzing anonymized consumer credit information from all three Nationwide Credit Reporting Agencies (NCRAs). The analysis assumed that the federal student loans were not forgiven as was recently decided by the Supreme Court.
Key findings are being made available for educational purposes only. Importantly, an individual's credit profile is unique and the exact impact on an individual's credit score will vary depending on various factors.
Key findings from the VantageScore study include:
POTENTIAL IMPACT ON CREDIT SCORES: Based on repayment behavior prior to the start of the forbearance period, VantageScore estimates that a range of scenarios are possible. Between 34% to 76% of borrowers may miss their first required federal student loan payment, resulting in a decline in their credit score. Depending on the scenario, the national average VantageScore could decline between 1 point and 9 points.
BORROWERS RESUMING PAYMENTS MAY EXPERIENCE SCORE INCREASES UP TO 8 POINTS: Student loan borrowers who resume their payments on time will likely experience a score increase of up to 8 points on average.
BORROWERS NOT RESUMING PAYMENTS COULD HAVE SIGNIFICANT SCORE DECLINE: Most of the estimated score decrease – varying between 49 and 82 points on average per consumer missing a payment – will occur after the information is reported to the three Nationwide Credit Reporting Agencies (NCRAs) and will likely be experienced by borrowers who will not be resuming their student loan payments at the end of the three-year pause.
"Based on prior loan payment behavior, we know a significant percentage of student loan borrowers will struggle with making payments when the forbearance ends and this likely will be exacerbated by today's Supreme Court decision," said Dr. Andrada I. Pacheco, Senior Vice President of Data Science and Modeling, who led the research for VantageScore. "An additional concern is that the restart of student loan payments may impact delinquency rates for other loan products, particularly for borrowers who increased other forms of debt while the pause was in effect. It's important for these borrowers to clearly understand their debt obligations and know how missed payments can impact their overall credit score."
In August of 2022, the Department of Education introduced "Fresh Start," a program designed to aid borrowers who have defaulted on their student loans. To learn more about this program and how to help avoid payment hardships, VantageScore has provided a helpful consumer FAQ.