Federal student loan borrowers are currently facing significant challenges in managing their loan payments, leading to a worrying trend that is adversely affecting the average credit score across the United States. This situation has raised alarm bells among financial analysts and economists alike.
According to a recent report released on Wednesday by the credit scoring firm FICO, the national average credit score for all consumers in the U.S. decreased to 715 in February. This reflects a one-point dip from January’s score and a two-point decline compared to the previous year. Such variations, although seemingly minor, can indicate broader economic challenges.
Tommy Lee, the senior director of analytics and scores at FICO, elaborated in the report that this decline can be partly attributed to the rising number of past-due federal student loan bills. These bills had been notably excluded from credit reports for nearly five years due to the special provisions enacted during and following the pandemic.
“The appearance of student loan delinquencies on credit reports has only recently begun to register, starting in February,” Lee noted. During that month, approximately 2.7 million federal student loan borrowers experienced new late payments recorded on their credit histories, with expectations of many more to follow in the upcoming months. This trend casts a shadow over the financial stability of many individuals.
While a decline of one point in the nation’s average credit score might seem insignificant, it conceals a much larger crisis affecting student loan borrowers. Historically, the average FICO score in the country does not drop frequently, making this decline particularly notable. In fact, this marks only the second instance in the past decade where the average FICO score has experienced a decline.
FICO scores are crucial for most U.S. lenders as they determine the terms of loans and whether financial services are extended at all. These scores range from 300 to 850, with scores from 670 to 739 classified as “good,” and scores above that threshold considered “very good” or “excellent.” A responsible borrower typically maintains a high score, while those falling below 670 are often categorized as having “fair” or “poor” credit, which can lead to higher interest rates or limited access to credit opportunities.
Understanding the Causes Behind the Surge in Delinquent Student Loan Payments
Millions of student loan borrowers who are currently behind on their payments are witnessing a dramatic decline in their credit scores. This situation has arisen even though many have not made any payments since March 2020, highlighting the long-term effects of the pandemic on financial health.
During the initial phase of the pandemic, former President Donald Trump instituted a pause on federal student loan payments, a measure that was later extended multiple times by then-President Joe Biden until October 2023. This unprecedented action was intended to alleviate financial burdens on borrowers during a challenging economic period.
To assist borrowers in transitioning back to regular payments after an extended hiatus, the Education Department under Biden introduced a year-long “on-ramp” initiative. This program ensured that delinquent payments would not be reported to credit bureaus during this period, allowing borrowers some reprieve. However, this on-ramp period ended in September 2024, meaning that loans due thereafter would trigger the delinquency clock once again.
For a federal loan to be classified as delinquent, a payment must be at least 90 days overdue, which explains why the credit consequences of missed payments are now becoming apparent in 2025. This delay in reporting has created a lag that is now catching up with many borrowers.
Looking ahead, FICO projects that an additional 5.4 million borrowers may be at risk of falling into the 90-day delinquency category concerning their student loans. “These additional delinquencies could lead to further declines in the average FICO Score over the next few months,” Lee warned, indicating a potential worsening of the situation.
Currently, over 40 million Americans are grappling with federal student loan debt, which has now surpassed b.6 trillion, highlighting the scale of this financial issue affecting the nation.
The Impact of Delinquent Student Loans on Credit Scores
For years, financial advocates and researchers have been sounding the alarm about the impending crisis for struggling student loan borrowers. As many navigate the financial landscape post-pandemic, the repercussions of these loans are becoming increasingly evident.
From March 2020 to October 2024, the period during which loan payments were paused and the subsequent “on-ramp” was in effect, inflation surged by over 22%. This rise in living costs has eroded the financial cushion that borrowers had initially gained from pandemic-era policies.
The initial financial relief provided by these policies has been quickly offset by escalating prices for essential goods such as rent, groceries, and other necessities. Advocate Betsy Mayotte emphasized in 2023 that for many borrowers, “that money just isn’t there anymore,” which reflects the stark reality many are facing.
A recent report from the New York Federal Reserve Bank projected a significant wave of delinquencies, estimating that more than 9 million student loan borrowers are likely to experience “substantial declines” in their credit scores due to late payments. This prediction underscores the potential for widespread financial distress among borrowers.
While the national average credit score has only seen a minor decrease of one point so far, individual student loan borrowers may experience drastic score drops resulting from delinquency. The impact is particularly severe for those with higher initial scores, indicating how critical it is for borrowers to maintain their credit health.
For borrowers with poor credit scores—those rated 620 and below—a delinquent student loan can lead to an estimated 87-point drop in their credit score, according to New York Fed research. Conversely, borrowers starting with scores of 760 or higher may see a drastic decline of up to 171 points due to a single delinquency.
“Although some of these borrowers may be able to resolve their delinquencies,” the researchers from the Fed noted, “the damage to their credit standing will have already been done, and it will remain on their credit reports for a duration of seven years.” This highlights the long-term consequences of these financial challenges.
Additional Resources and Insights from Money:
Explore the Best Private Student Loans Available in April 2025
Discover How 4 Borrowers Successfully Paid Off Their Student Loans Ahead of Schedule
Learn About Trump’s Plan to Transition the Student Loan Portfolio to the SBA and What Borrowers Need to Consider
