Spring and summer are traditionally hot months for home buying, but some buyers with student loan debt may encounter unexpected problems.
Nearly 10 million federal student loan borrowers face delinquency, potentially reducing their credit scores by 150 points, according to a report released by the Federal Reserve Bank of New York on March 26th. This is why this is happening and what borrowers can do.
Why the arrears are rising
From March 2020 to September 2023, federal student loan payments were suspended as an emergency pandemic measure. To move borrowers to repayment, the Biden administration created a 12-month student loan that was not punished, with a 12-month period that was delayed or missed payments.
The lamp ended on September 30, 2024, but a data analysis from the New York Fed found that many borrowers have never resumed their payments. You may not need a significant number. Borrowers regarding savings in a valuable education (SAVE) repayment plan have suspended payments since last summer due to ongoing lawsuits. However, others are currently subject to penalties.
The late payments began a hit in January and are still rolling out. Federal student loans will be postponed as soon as the due date has passed, but the loan servicer (the company that processes student loan payments) will not report delinquency to the credit department until the loan is 90 days in advance.
Guidance from the Ministry of Education during the Lamp era helps explain the continued impact on individual credit reports. “The servicer was instructed to apply the basis to retrospectively raise that account,” explains Scott Buchanan, executive director of the Student Loan Service Alliance, an industry association for student loan services. Each borrower’s timeline depends on the date of the most recent end of tolerance.
The outcome of non-payment
The long break from repayment, coupled with confusion about when payments were resumed, led to a situation where borrowers were surprised they had missed the payment.
“We’re committed to working with people who are looking for a way to help us,” said Stephen Kibel, a certified financial planner based in Franklin, Tennessee. “I had one client who thought her loan was still being postponed from graduate school. They weren’t. She was five months behind.”
When a student loan is reported as delinquent, the borrower’s credit score pays the price.
“The people who may feel the most painful are those with higher scores,” says Martin Lynch, president of the American Association of Financial Counseling. “Their score could result in a 150-point loss if they fall into delinquency.”
The authors of the New York Fed Report estimate that student loan delinquency could damage credit scores above 170 points. Looking at it, home buyers with a credit score of 760 can reasonably expect to qualify for a traditional mortgage, the most common type of mortgage. However, with a credit score of 590, an FHA loan (which involves additional costs and requires a higher minimum down payment) may be your only option.
A credit score is key to how lenders calculate the interest rates they offer to borrowers, and a decline in your credit score means an increase in your mortgage rate. Such a sudden drop could potentially turn a home from stretch to affordable.
If you allow a loan that arises after a 270-day non-payment to default, your mortgage lender may refuse your application.
“In September, I worked with the couple who saved $40,000 for a down payment. But the default on student loans two years ago killed a mortgage application,” recalls Andrew Lokenauth, a Tampa-based credit counselor who writes Fluent for his finance newsletter. “Even after we got back on track with payments, most lenders didn’t touch them.”
Borrowers can take it now
If you are unsure of your federal student loan status, go to dusttainid.gov to view your payment history and find out more about your student loan servicer.
“There have been a lot of changes during the pandemic. We have discovered that our clients have changed their servicers even if they didn’t know,” says Rokenaus. Once you have your student servicer information, please log in to your account on the servicer’s website. Make sure all contact information is up to date.
Regular payments come from all federal student loan borrowers except those using a save plan. If you miss one or more payments, take action immediately. Contact the servicer and ask for the options available to keep your account up to date. Preventing additional damage must be a priority.
“What’s worse than 90-day delinquency in a credit file is 120 days of delinquency,” Buchanan says.
And the impact will only continue to grow. Delinquency can harm your credit, but the default for federal student loans allows you to withhold wage decorations, tax refunds and federal benefits, and lose access to relief options.
If payments require time to get back on track, the servicer may offer several ways to put your loan on hold. Tolerance temporarily suspends payments, but interest is accrued. Deferral is another option. There is no interest accrued, but you must qualify for eligibility.
Additional student loan help is available if necessary. A nonprofit credit counselor or financial advisor who is a certified student loan expert can help you plan to resume payments. Your university’s financial aid office may be able to walk you through your options, even if you left school years ago. We recommend checking if another repayment plan will be more affordable, but it may take some time to change your plan as your income-driven repayment plan application is not currently being processed.
Advice for home buyers
Delinquency from unpaid student loans may mean putting homeview implants on hold, but you don’t need to sink them. Negative comments will remain on your credit report for up to 7 years, but by keeping your account up to date and resuming payments successfully, lenders can show that one mistake is not a pattern. (These moves should also help you begin your credit recovery.)
“If your loan is up to date, even if you have a large balance, (mortgage) lenders are actually much more flexible than people give them credit,” Kibel says. He recommends finding a mortgage broker who has experience working with borrowers on student debt to help you search for your lender. If you have a credit challenge, mortgage lenders who offer manual underwriting where the application is first evaluated by the individual rather than the program can also be a great help. It’s true that it’s a set-up, but student loan delinquency means you don’t have to close your homeowner’s door.
Kate Wood writes for Nald Wallet. Email: kwood@nerdwallet.com.
Home buyers could face a surprising credit hit from the student loans that originally appeared on Nerdwallet.
Original issue: April 23, 2025, 1:13pm EDT
