Spring and summer are traditionally hot months for homebuying, but some would-be buyers with student loan debt could encounter unexpected trouble.
Nearly 10 million federal student loan borrowers may be facing delinquency, potentially dropping their credit scores by 150 points or more, according to a report released by the Federal Reserve Bank of New York on Mar. 26. That kind of damage could torpedo homebuying plans. Here’s why this is happening, and what borrowers can do.
Why delinquencies are rising
From March 2020 through September 2023, federal student loan payments were suspended as an emergency pandemic measure. To transition borrowers back to repayment, the Biden administration created the student loan on-ramp, a 12-month period when late or missed payments weren’t penalized.
The on-ramp ended on Sept. 30, 2024, but the New York Fed’s data analysis found that many borrowers never resumed making payments. A substantial number may not have to: Borrowers on the Saving on a Valuable Education (SAVE) repayment plan have had their payments paused since last summer due to ongoing litigation. Others, however, are now subject to penalties.
Delinquencies started hitting in January and are still rolling out even now. Though a federal student loan is delinquent as soon as the due date has passed, loan servicers — the companies that handle student loan payments — don’t report delinquencies to credit bureaus until the loan is 90 days past due.
Guidance from the Department of Education during the on-ramp period helps explain the ongoing impacts on individual credit reports. “Servicers were instructed to apply forbearance to retroactively bring that account current,” on a rolling basis, explains Scott Buchanan, executive director of the Student Loan Servicing Alliance, a trade association for student loan servicers. Each borrower’s timeline depends on the end date of their most recent forbearance.
Consequences of nonpayment
The lengthy break from repayment coupled with confusion around when and for whom payments resumed has led to situations where borrowers are surprised to find they have missed payments.
“People change email addresses, move, or just don’t check the portal,” says Steven Kibbel, a certified financial planner based in Franklin, TN. “I had one client who thought her loans were still deferred from graduate school. They weren’t. She was five months behind.”
“It’s people with higher scores who might feel the most pain,” says Martin Lynch, president of the Financial Counseling Association of America. “Their scores may see a 150-point loss if they fall into delinquency.”
The authors of the New York Fed report estimate that a student loan delinquency could damage a credit score of 760 or higher by more than 170 points. To put that in perspective, a home buyer with a credit score of 760 can reasonably expect to qualify for a conventional home loan, the most common type of mortgage. But with a credit score of 590, an FHA loan — which comes with additional costs and requires a higher minimum down payment — could be their only option.
Credit scores are key to how lenders calculate the interest rates they offer borrowers, and lower credit scores will mean higher mortgage rates. That kind of sudden drop could potentially shift homebuying from being a stretch to being unaffordable.
Allowing loans to fall into default, which happens after 270 days of nonpayment, could lead a mortgage lender to reject an application.
“Back in September, I worked with this couple who’d saved $40,000 for a down payment. But their student loan default from two years ago killed their mortgage application,” recalls Andrew Lokenauth, a Tampa-based credit counselor who writes the Fluent In Finance newsletter. “Even after they got back on track with payments, most lenders wouldn’t touch them.”
Steps borrowers can take now
If you’re not sure about your federal student loans’ status, go to studentaid.gov to view your payment history and find information on your student loan servicer.
“A lot changed during the pandemic. I’ve had clients discover their servicer changed without them knowing,” says Lokenauth. Once you’ve got your student servicer information, log in to your account on your servicer’s website, too. Make sure all of your contact information is up-to-date.
Regular payments are due from all federal student loan borrowers except those on the SAVE plan. If you’ve missed one or more payments, take action immediately. Contact your servicer and ask what options are available to get your account current. Preventing additional damage should be a priority.
“The only thing worse than a 90-day delinquency on your credit file is a 120-day delinquency,” Buchanan says.
And the repercussions only keep growing. While a delinquency harms your credit, defaulting on federal student loans can trigger wage garnishment, having tax refunds and federal benefits withheld, and losing access to relief options.
If you need time to get back on track with payments, your servicer may offer you a couple of ways to put your loan on hold. A forbearance will temporarily pause your payments, though interest will accrue. Deferment is another option; interest doesn’t accrue, but you’ll have to meet eligibility qualifications.
Additional student loan help is available if you need it. A nonprofit credit counselor or a financial advisor who’s a Certified Student Loan Professional could help you come up with a plan for resuming payment. Your college’s financial aid office may also be able to walk you through options, even if you left school years ago. You may want to see if a different repayment plan would be more affordable, but because applications for income-driven repayment plans aren’t currently being processed, changing plans could take time.
Advice for home buyers
A delinquency from unpaid student loans may mean putting homebuying plans on hold, but it doesn’t have to sink them. Even though negative remarks stay on your credit report for up to seven years, getting the account current and successfully resuming payments can show lenders that one mistake isn’t a pattern. (These moves should also help you begin to restore your credit.)
“If the loan is current, even with a big balance, [mortgage] lenders actually are a lot more flexible than people give them credit for,” Kibbel says. He recommends finding a mortgage broker experienced in working with borrowers with student debt to aid your lender search. A mortgage lender that offers manual underwriting, where your application is initially evaluated by a person rather than a program, can also be a big help if you’ve had some credit challenges. Though it’s certainly a setback, a student loan delinquency doesn’t have to shut the door on homeownership.
