Student Loan Credit Report Damage Surges — 4 Things Borrowers Can Do

Student loan borrowers are facing an unprecedented credit damage crisis as the federal student loan repayment system remains mired in turmoil, delinquencies surge, and the Trump administration ramps up collections efforts. As a result, millions of student loan borrowers are seeing their credit score plummet as missed or late payments hit their credit report.

For more than four years, borrowers were shielded from adverse consequences associated with missed student loan payments. Covid-era policies paused payments and interest accrual. When student loan repayment resumed in 2023, the Department of Education and loan servicers extended flexibilities for borrowers that avoided adverse credit consequences, even when borrowers missed a payment. But all of those relief programs have come to an end.

“Only 38 percent of borrowers are in repayment and current on their student loans,” said the Department of Education in a statement last month where Education Secretary Linda McMahon announced the resumption of collections actions against defaulted borrowers. “Most of the remaining borrowers are either delinquent on their payments, in an interest-free forbearance, or in an interest-free deferment.” The department estimates that 5.3 million borrowers are already in default on their federal student loans, and another four million are more than 90 days past due. Default occurs once a borrower is 270 days behind on their federal student loan payments.

Student Loan Borrowers See Credit Scores Drop As Repayment System Remains Mired In Turmoil

A new report from the New York Fed’s Center for Microeconomic Data found that the student loan delinquency rate surged from below 1% to nearly 8% during the last year, with more than 2.4 million borrowers experiencing damage to their credit report as a result. These borrowers saw their credit scores plummet by more than 100 points, with more than a million seeing a drop by more than 150 points.

The surge in credit report damage that student loan borrowers are experiencing comes as millions of borrowers are having difficulty accessing affordable repayment plans. For months, the income-driven repayment application system was largely shut down due to a legal challenge brought by Republican state leaders over a Biden-era repayment program. IDR plans encompass a group of separate repayment plans that offer borrowers affordable monthly payments based on their income and family size, as well as a pathway to eventual student loan forgiveness.

Earlier this year, the Department of Education shut down the IDR application system in response to a new order issued by a federal appeals court, leaving millions of borrowers with no way of accessing any IDR program. In response, the American Federation of Teachers filed a lawsuit, arguing that the shutdown was unlawful and was pushing borrowers into delinquency and default. Last week, the department officially resumed application processing, but revealed in a court-ordered progress report that nearly two million IDR applications remain unprocessed.

“Millions of borrowers are being denied their legal right to an affordable repayment option,” said AFT President Randi Weingarten in a statement last week in response to the processing update released by the department.

“This filing confirms what borrowers have known for months: their applications for loan relief have effectively been going into a void,” said Student Borrower Protection Center Legal Director Winston Berkman-Breen in a statement. The SBPC is representing the AFT in its legal challenge.

Trump Administration Targets Defaulted Federal Student Loan Borrowers With Collections Actions

Meanwhile, the Trump administration announced that collections efforts against defaulted federal student loan borrowers would be ramping up.

“Resuming collections protects taxpayers from shouldering the cost of federal student loans that borrowers willingly undertook to finance their postsecondary education,” said the Department of Education in a statement last month.

Last week, more than five million defaulted federal student loan borrowers received email notifications warning them that tax refund seizures and administrative wage garnishment would begin in the coming weeks. Borrower advocacy groups were critical of the administration’s efforts, particularly in the context of mass Department of Education layoffs and the ongoing failures of the IDR application system.

“More than six million borrowers are set to once again face a range of severe and punitive consequences as the federal government’s vast debt collection machine turns back on,” said The Institute for College Access and Success in an email in April. “Borrowers have fewer resources than ever to navigate their repayment options, and those options are ever shifting. For many borrowers, this is likely to mean default. For those already in default, getting back on track is likely to be even more difficult than ever.”

How Student Loan Borrowers Can Deal With Credit Report Damage And Drops To Credit Scores

Student loan borrowers who are facing credit damage and drops to their credit scores associated with delinquency and default do have some options.

Dispute Inaccurate Student Loan Credit Reporting

If you believe that you have been improperly reported as late or delinquent on your student loans, you can submit a dispute pursuant to the Fair Credit Reporting Act, or FCRA.

First, bring the issue to your student loan servicer’s attention to see if they can correct the inaccurate credit reporting. If they don’t do that, you can file a dispute directly with each national credit reporting bureau. The credit bureaus must conduct an investigation, which typically lasts 30 days. If the dispute isn’t resolved in your favor and you are harmed financially as a result (i.e., you’re denied a mortgage, or you are forced to accept a higher interest rate for a loan or line of credit), you may have a basis to explore litigation under the FCRA.

However, it’s important to understand that only inaccurate credit reporting can be successfully disputed in most cases. Accurate reporting, even if it’s unfair, may have to remain on your credit report. For example, if you were late making your student loan payments because you missed a billing notice, that’s probably not going to be a viable basis for a dispute because the associated reporting that you were late is accurate. In contrast, if you make an on-time payment and are then reported as 90-days late on your credit report, that could be a basis for a dispute.

Get Current On A Delinquent Student Loan

If you are behind on your student loan payments, you may have time to avoid negative credit reporting, or at least contain the damage. Some loan servicers don’t report a delinquency until the borrower is 90 days past due.

“We report to the consumer reporting agencies on a monthly basis, on the last day of every month,” says Nelnet, one of the Department of Education’s contracted loan servicers, in published guidance. “We will begin to report a loan delinquent once it is 90 days or more past due.”

If you can’t afford to pay the past due amount, you may be able to contact your loan servicer to request a retroactive deferment or forbearance to bring your student loan account current and cancel out the past due balance. Borrowers can also apply for income-driven repayment plans if they are having trouble affording their regular monthly payments. Borrowers who apply for an IDR plan may be placed into a forbearance while their application is processed, pausing repayment in the interim. Processing forbearances can count toward student loan forgiveness under the Public Service Loan Forgiveness program for a period of up to 60 days.

Cure A Federal Student Loan Default

If you are more than 270 days past due on your federal student loan, you’re probably in default. Defaulting on a federal student loan is serious and will lead to additional credit damage. And the Trump administation’s recent ramp up of collections operations means you may soon be subject to federal benefits offset, tax refund seizure, and wage garnishment. The government has powerful tools to pursue defaulted federal student loan borrowers without even needing to step foot in a courtroom.

But there may be pathways to get out of default. Federal student loan rehabilitation can allow borrowers to restore their defaulted loan to good standing, with a deletion of any reference to default on the borrower’s credit report. Direct loan consolidation is another potentially pathway to get a federal student loan out of default; it’s faster than rehabilitation, although it does not result in a deletion of the default on a borrower’s credit report. There are other important considerations for both of these programs, including the potential assessment of collections fees. Borrowers can also explore administrative discharge options, such as Total and Permanent Disability, if they qualify.

Keep A Positive Student Loan Payment Record

If you’ve already incurred some damage on your credit report due to being late on a student loan payment, there may not be an easy way to immediately reverse the negative reporting, even if if you take some of the above steps. However, maintaining a positive payment history from here on out will start the slow process of repairing your credit. Gradually, the late marks will become less important to future creditors as you re-establish a record of on-time payments, and your score should gradually improve over time. And after seven and a half years following the initial delinquency, the FCRA provides that the associated negative credit reporting should drop from your credit profile entirely.