Collecting default student loans to resume May 5th: What do you know?
Since the pandemic, federal student loan borrowers have mostly been protected from the toughest results of default. It is about to change to May 5th.
Just as the Department of Education (ED) is reopening its unwilling collection of default debt, another credit agency rings alarm bells with student loan delinquency.
According to a Transunion survey released Monday, a record high of 20.5% of student loan borrowers are seriously behind on their own by February. This is comparable to 11.5% just before the February 2020 pandemic, and can even be modest.
“It’s been reported that more than one in five student loan borrowers with due dates are seriously behind on payments, but this figure may actually be much higher,” says Michele Raneri, Vice President and Head of Research at Transunion.
Last month, credit scoring company FICO warned about a surge in student loan borrowers who have suffered serious delinquency.
Serious delinquency is a huge hit in credit scores, increasing the cost of a loan and limiting how many people can borrow in the future.
“Consumers may have been shocked by the dramatic and immediate impact that defaults have on their credit scores,” said Joshua Trumbull, Senior Vice President and Director of Consumer Loans at Transunion.
How much can my credit score be reduced?
Student loan payments resumed in September 2023, and borrowers were given a one-year “on-ramp” in which they did not report non-payment to the credit department. Last month, the education department said it would resume effective collection activities on May 5th.
Consumers who have faced defaults since the end of the ramp have dropped their credit scores by an average of 63 points, TransUnion said.
Last month, credit scoring firm FICO said the average score used by lenders to assess risk fell to 715, down from January to two points a year ago. The decline reflected an increase in delinquency over 90 days over the past six months, according to FICO.
Who is losing your biggest credit score?
Super Prime, or top-tier student borrowers can usually see the biggest hits from serious delinquents and default credit scores.
“Those with a low percentage of Super Prime borrowers were very delinquent, but those who ultimately defaulted thought the impact on their credit scores was significantly greater than those of traditionally high-risk credit groups,” says Transunion. “This can have a major impact on default accounts, as this is primarily due to the fact that borrowers in the higher credit risk class usually have a mild rog mark.”
On average, Super Prime borrowers could hit a credit score of 175 points, while Prime borrowers could suffer a 121 point decline, Transunion said. This is comparable to a 42-point decline in subprimes or a 64-point decline in lowest tiers, borrowers and near-kind borrowers. Key borrowers may experience a 99 percentage point reduction in their credit score.
How many people are behind on the delinquent?
FICO Director Tommy Lee said there were even more late in the future as around 2.7 million student loan borrowers were in serious delinquent in February, with all of their loans having different dates.
Between March and April, he said there could be more than 5 million serious delinquent reports.
Medora Lee is a money, market and personal finance reporter for USA Today. You can contact her at mjlee@usatoday.com and subscribe to our free daily money newsletter for personal finance tips and business news every Monday through Friday.