The Financial Times reports that more than 9 million Americans holding student loans have fallen behind on at least one payment this year, as delinquencies surge across the 1.7 trillion dollar student debt market following the expiration of the Biden administration’s pandemic era payment pause.
According to the government’s Financial Stability Oversight Council, student loans now stand out as “a notable exception” amid otherwise low default rates for household borrowing nationwide.
Although student loans have long carried higher default risks than other forms of consumer credit, the council noted that the share of balances overdue by more than 30 days has doubled since the repayment moratorium began in early 2020.
This spike in missed payments coincides with growing evidence that recent college graduates are struggling to secure stable employment as the U.S. labor market cools after years of post pandemic expansion.
“They just don’t have the money,” said Charlie Wise, senior vice president and head of global research and consulting at TransUnion. “That speaks more broadly to some of the weaknesses that we’ve seen in the jobs market for recent grads.”
Survey data from TransUnion underscores the financial strain. In a summer poll of borrowers who had missed payments, nearly half reported that they simply could not afford their monthly bills, while another quarter said they were holding out for additional clarity on loan forgiveness. The typical monthly student loan payment now hovers around 200 dollars.
While the FSOC did not detail the precise volume of debt in default, data from the New York Federal Reserve shows that 9.6 percent of the nation’s 1.65 trillion dollars in student debt was more than 90 days overdue in the third quarter. Although slightly below the previous quarter, that figure represents a dramatic jump from just 0.5 percent one year earlier.
“Over 9 million student loan borrowers have transitioned to delinquency since credit reporting resumed,” the FSOC stated, adding that missed payments have “driven steep declines in credit scores.”
Those credit score declines carry serious consequences. Borrowers who fall behind face significantly reduced access to financing for major purchases such as cars and homes. VantageScore data cited by the FSOC shows that delinquent borrowers experienced an average credit score drop of 100 points, often pushing them from near prime status above 600 down into subprime territory below 550.
Although roughly one third of delinquent borrowers have since brought their loans current, the FSOC warned 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 Fed analysis published in May found even sharper declines among borrowers previously considered prime or super prime. Those with credit scores above 720 saw their scores fall by an average of 177 points after becoming delinquent.
The majority of newly delinquent borrowers, 56.6 percent, already had credit scores below 620. They lost an average of 74 points, pushing them further out of the near prime category, according to the Fed.
“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.”
While some initially attributed the surge in delinquencies to confusion over when payments resumed, data from both the New York Fed and Equifax show that elevated delinquency rates persisted well into the third quarter.
A TransUnion survey conducted in August found that awareness was not the primary issue. Only 4 percent of respondents were unaware that payments had restarted, and just 16 percent of those who missed payments said they did not realize the pause had ended.
Federal student loans were placed into forbearance early in the coronavirus pandemic, with payments officially resuming in October 2023. However, late payments were not reported as delinquent until September 2024, effectively extending the pause’s impact.
Wise acknowledged that the initial freeze was justified but criticized the prolonged delays. The payments holiday, he said, was “very necessary” early on, but there was also an “unwillingness to restart the payment engine.”
“They pushed it off and pushed it off and pushed it off,” Wise said.
Swonk echoed concerns about the broader policy response, arguing that government intervention went too far.
“We overshot the stimulus during the pandemic,” she said. “There was a reason we did it, but there was an echo effect and this is one of many.”
Until Washington ends its addiction to government-sponsored student lending, Americans will keep paying the price for a broken higher education cartel.
