Millions of Americans hit with bad credit after missed student loan payments

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Millions of Americans are suddenly facing dramatically lower credit scores from delinquent student loans, making it tougher for them to secure housing, insurance, car loans, even employment at a vulnerable time for the U.S. economy.

Credit scores dipped by more than 100 points for 2.2 million delinquent student loan borrowers, and 150 points or more for more than 1 million in the first three months of 2025, according to an analysis by the Federal Reserve Bank of New York. It’s the kind of credit score drop that follows a personal bankruptcy filing. Roughly 2.4 million of those Americans previously had favorable credit scores and would have qualified for car loans, mortgages or credit cards before these delinquencies were reported, researchers said.

The slide in credit scores could lead to pricier loans for millions as borrowing costs are near 20-year highs. The Federal Reserve has signaled that it doesn’t plan to cut interest rates right away.

Already there are signs that lower credit scores are making it harder for more Americans to get loans, with rejection rates for auto loans, credit cards and mortgage refinancing all ticking up in February, compared with a year earlier.

Tina Johnson was two days away from finalizing the purchase of a used Nissan Pathfinder when she got notice that her preapproved loan was no longer valid. Her credit score had fallen from 650 to 418 after she missed $440 worth of student loan payments that she didn’t realize were required again. Although the Department of Education said lenders would send borrowers a bill at least three weeks before it was due, Johnson said she was never notified that payments needed to resume.

“Nothing, no email, no phone call, no letter—I could’ve avoided all this if I had known,” said Johnson, 44, who lives in Fleming County, Kentucky.

Johnson’s expected car payment of $350 a month nearly doubled overnight, making it unaffordable for the DoorDash delivery driver. She’s stuck with her 12-year-old Nissan Altima for now. Johnson says she’s also putting off other plans, including borrowing against her home to repair her roof and going back to school for a bachelor’s degree, because of the sudden hit to her credit score.

“I took care of the accounts, but there’s nothing else I can do,” she said. “It’ll take me years to get those 200 points back.”

Federal student loan payments were paused early in the coronavirus pandemic in March 2020, offering millions of Americans relief at a time of economic upheaval and high unemployment. Although payments started back up in late 2023, the Biden administration offered a year-long grace period. That ended on Sept. 30, but millions of borrowers have yet to make a payment on their student loans.

This month the federal government restarted collection efforts for defaulted student loans and said it plans to resume seizing wages, tax returns and Social Security payments this summer, making the stakes even higher.

Nearly 1 in 4 borrowers required to make loan repayments were more than 90 days behind at the end of March, according to the Federal Reserve Bank of New York analysis. And although younger Americans tend to hold the most student debt, borrowers ages 40 and older are most likely to be behind on their loans, suggesting that years of inflation are making it harder for middle-aged Americans to keep up with payments.

“This is the beginning of something big, and we need to be paying attention,” said Dominik Mjartan, chief executive of American Pride Bank in Macon, Georgia. “There’s a very high cost to having a low credit score in America. Your cost of living goes up—your cellphone bill, your utilities, your insurance payments, everything. And that trickles down through the economy.”

Credit scores, which generally range from 300 to 850, offer a snapshot of a person’s financial history that takes into account debt levels, bill-paying record and length of credit background. They’re used by lenders of all types, as well as landlords, employers, insurance firms, cellphone providers and utility companies to gauge how likely someone is to make loan payments on time. A good credit score, generally 670 or higher, can translate to lower interest rates and higher credit limits, while a subprime score, under 620, can disqualify borrowers from most conventional loans.

“It’s been a major hit to credit scores, and for a lot of people, has been enough to put them in subprime territory, making it very difficult to get loans at decent interest rates,” said Stefania Albanesi, an economics professor at the University of Miami and a former researcher at the New York Fed. “And while credit scores can drop quickly, they recover very slowly. Even if you’ve gotten back on track with your payments, it can take years to get back to where you were before.”

Recent student loan delinquencies have helped drag down the average credit score for all Americans to 715 in February—the lowest level since early in the pandemic, according to FICO, a data firm used by lenders.

Journey Butler graduated with a degree in political science from Florida A&M University a couple of years ago and had planned to start law school next year. But that is up in the air after she found out last week that her credit score had dropped 168 points, to 521.

Butler thought her student loans were still on hold, since she had obtained an extension due to a local natural disaster last year. She’d missed a couple of voicemails and emails from her loan provider, and she didn’t realize anything was wrong until she got an alert about her dinged credit. The 21-year-old quickly paid off her $500 balance but was told it could take years for her credit to recover.

Now Butler says it will be next to impossible to secure a new apartment, much less more student loans.

“I got that message and everything kind of went crashing down,” said Butler, who works for a health insurance company in Tallahassee. “You need a background check to get a job, to buy a house, to get car insurance. It literally affects every area of my life.”

There are signs that Americans are already having trouble accessing credit. Nearly 42 percent of mortgage refinance applications were turned down in February, up from 27 percent a year earlier, according to a New York Fed survey. Rejection rates for car loans jumped from 2 percent to 14 percent in the same period, while credit card denials grew five percentage points to 22 percent. Meanwhile, the share of discouraged borrowers—who needed credit but did not apply for it because they didn’t think they would be approved—rose to a record high of 8.5 percent, according to the survey, which dates back to 2013.

“Of course there are ripple effects: People’s financial margin for error was already pretty tiny, and when you add in student loan payments for the first time in several years, that makes a big difference,” said Matt Schulz, chief consumer finance analyst at LendingTree, an online loan marketplace. “There’s no way rising student loan delinquencies won’t have some sort of effect on people’s ability to repay other types of debt as well.”

Destiny, a 30-year-old in Georgia, is set to start a tech job in the Midwest next month. But first she has to find a place to live, which she says has become unfeasible since her credit score plunged seemingly overnight from the high 700s to the low 400s.

Destiny, who spoke on the condition that she be identified by only her first name because she fears losing her job offer, was between jobs and trying to get $44,000 in student loans deferred when payments started back up late last year.

“Every property manager looks at me and says, ‘Your credit score is too low,’” she said. “I had worked so hard to get my credit score up, but then this hit and I can’t get the bare minimum of a roof over my head.”

Economists expect another decrease in credit scores in the coming months, as more student loans get flagged as overdue. Although 2.7 million borrowers were reported newly delinquent in February, twice as many—5.4 million—had not been marked delinquent even though they haven’t made any student loan payments since October, according to FICO.

The rise in student loan delinquencies and subsequent drop in credit scores, economists say, is an early sign that Americans are under increasing financial strain. In interviews, borrowers said their household budgets had changed since 2020, when many of them last made regular payments toward their student loans. Higher costs for groceries, utilities, gas and other necessities have stretched them thin, making it tougher to shoulder new loan payments.

The restart of student loan payments and the impact of delinquent borrowers’ lower credit scores is expected to reduce overall economic growth this year by about 0.13 percent, according to estimates from Moody’s Analytics. That drag comes at a tenuous time for the economy, which shrank in early 2025 mostly because of a rush of imports that counted against GDP.

“The fact that student debt can be garnished from your wages – that becomes a very different risk,” said Mjartan of American Pride Bank. “It’s a downward spiral: If you can’t keep up with your student loans and your wages get garnished, then you can’t pay your other debts, either, and you can’t spend.”

Kayla Moore found out in March that her credit score—a “good” 730—had fallen by more than 100 points to become subprime after three missed student loan payments of $30 apiece.

Moore, who had already paid off $5,500 in loans, said her father had offered to cover the last $1,000. She didn’t realize those payments had slipped through the cracks until she got emails from Credit Karma and Experian. She immediately paid the balance in full but says her credit score has barely budged, to the mid-600s.

“I basically lost my mind when I saw what had happened,” said Moore, 24, who works at a bank in Chicago. “I really wanted to move to a nicer apartment this year, and now I’m worried they’re going to see my credit score and immediately deny me.”