Borrowers who default on student loans are seeing their credit scores plummet dramatically after just 90 days of missed payments, according to an Associated Press report. When accounts are reported as delinquent to major credit bureaus, the damage to credit scores can be nearly as severe as filing for personal bankruptcy.

These lower credit scores create substantial financial hurdles, making it more difficult and expensive to secure auto loans, mortgages, credit cards, and even auto insurance. The timing couldn't be worse, as many consumers already face financial strain from high inflation, rising interest rates, and widespread layoffs. Data from the Federal Reserve Bank of New York reveals that as of Q1 2025, approximately 2.2 million student loan borrowers experienced credit score drops of about 100 points, with an additional 1 million seeing declines exceeding 150 points. Such significant decreases could render credit card interest rates unaffordable and potentially derail rental applications.

The U.S. Department of Education had suspended federal student loan repayments since March 2020 at the pandemic's onset. While the Biden administration extended this pause through October 2024, the previous administration reinstated collection efforts last month — including wage garnishments and tax refund seizures — to recover outstanding debts. New York Fed data shows that by March 2025, one-quarter of student loan borrowers were more than 90 days delinquent.

Credit scores serve as a crucial metric for lenders, landlords, credit card issuers, employers, and utility companies to assess repayment risk. Higher scores typically secure better interest rates and loan terms, while lower scores create substantial borrowing barriers.

The Education Department states that borrowers should receive billing notices three weeks before payments come due, yet many report receiving no such notifications. Consumer advocates blame excessive call wait times and department staffing cuts for service delays. "The full impact of resumed collections will unfold over coming months," warns credit risk expert Kevin King, noting that years of government relief programs have left many borrowers confused about their obligations.

King predicts student loan payments will climb consumers' "payment hierarchy" as enforcement intensifies. Previously, with limited collection efforts, many borrowers deprioritized these payments. Now, aggressive measures like wage garnishments and tax refund intercepts are forcing repayment. New York Fed research also reveals borrowers over 40 are most likely to default on student loans, highlighting particular financial stress within this demographic.

The resumption of collections promises lasting consequences for borrowers' credit histories, potentially affecting daily financial activities and overall quality of life. Beyond individual hardship, this policy shift may reshape credit decisions throughout the broader economy.