In an alarming revelation from the Federal Reserve Bank of New York, over nine million federal student loan borrowers could potentially see a significant drop in their credit ratings in Q1-2023 due to the end of multiple COVID-19 pandemic relief measures. Research conducted during the pandemic indicated a sharp decrease in student loan balance growth and delinquency rates as borrowing students were granted forbearances.
As several of these beneficial programs conclude, the New York Fed projects that repayments won't resume at pre-pandemic rates. It's estimated that these delinquent loans, amounting to upwards of $250 billion, are held by approximately 9.7 million borrowers. The expected decline in credit scores, as projected by the New York Fed, could reach 171 points and would plague borrowers' credit reports for seven years.
During the onset of the COVID-19 pandemic, federal student loan payments were suspended and no interest accumulated on borrowers' balances. This amnesty period lasted until September 2023. However, savers were given a one-year grace period in which missed payments would not impact credit scores. Failure to recommence repayments by October meant that borrowers were vulnerable to credit score hits by February.
The discontinuation of the relief measures would most likely affect recent college graduates who are making their first loan payments and are at a higher risk of missing a payment or facing default. Legal disputes concerning several income-driven repayment plans may further increase the number of delinquent borrowers. Applications for all these IDR plans were temporarily halted due to the lawsuit and only recommenced this week, creating a significant problem for many borrowers who were denied access to more manageable monthly repayments.