A new report from the New York Federal Reserve found that while Americans’ credit card debt is falling, an uptick in student loan delinquencies is causing credit scores to decline.
The New York Fed’s Center for Microeconomic Data released a quarterly report which showed overall household debt rose by $167 billion – with credit card debt declining by $29 billion. The report noted that the pattern of credit card debt declining is a typical seasonal pattern as consumers pay down holiday debt from the end of last year.
However, the report noted that the delinquency rate for student loans surged from below 1% to nearly 8% following the end of the pause in reporting delinquent student loans.
Student loan payments were paused from the onset of the COVID-19 pandemic in early 2020 until September 2023, which helped delinquencies decline to less than 1%. When student loan payments were resumed, policymakers included a one-year ramp-up period intended to prevent borrowers’ missed payments from being reported to credit bureaus. That expired in October 2024, with delinquencies being included on credit reports in the first quarter of 2025.
STUDENT LOAN BORROWERS IN DEFAULT BEGIN FACING DEBT COLLECTIONS
The report found that while more than half of the newly delinquent borrowers already had subprime credit scores, about 2.4 million borrowers who entered delinquency this year had scores over 620 that could’ve allowed them to qualify for auto and mortgage loans, as well as credit cards, prior to the delinquency being reported.
There were 3.2 million borrowers whose scores were under 620, representing 56.6% of the newly delinquent population. They saw their credit scores decline by an average of 74 points.
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The 2 million borrowers with scores in the 620 to 719 range represented 35.9% of new delinquencies, and their credit scores fell by an average of 140 points. There were just 400,000 borrowers with credit scores over 720 who entered delinquency, representing 7.5% of that group, and their scores declined by an average of 177 points.
Overall, more than 2.2 million student loan borrowers who entered delinquency saw their credit scores fall by more than 100 points, while over 1 million saw drops of at least 150 points.
HERE’S WHY THE AVERAGE US CREDIT SCORE IS FALLING
The report found that seven states have a conditional student loan delinquency rate – which excludes borrowers who don’t have a payment due – above 30%, including Mississippi (44.6%), Alabama (34.1%), West Virginia (34%), Kentucky (33.6%), Oklahoma (33.6%), Arkansas (33.5%) and Louisiana (31.8%).
At the end of the first quarter, over 20 million federal student loan borrowers weren’t in repayment and five million had a zero-dollar monthly payment.
“After a five-year hiatus, student loan delinquency has returned to the pre-pandemic ‘normal’ with more than 10 percent of balances and roughly six million borrowers either past due or in default,” the New York Fed wrote.
It noted that the collections process that resumed in May includes the “garnishment of wages, tax returns, and Social Security payments.”
“Additionally, millions of borrowers face steep declines in their credit standing which will increase borrowing costs or seriously limit their access to credit like mortgages and auto loans,” the New York Fed noted, adding it will monitor whether these repayment issues will spill over into other categories of consumer credit.
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