Millions of Americans with federal student loans are about to realize a new phase: late payments will soon cease being mere private business and will also be reported to credit bureaus. The COVID-era,”on-ramp” policy, allowing borrowers to skip payments free from both penalties and damage to their credit score, officially expires on May 5. This signals a major shift with the President Donald Trump administration’s new approach to student loan debt: personal accountability and strict enforcement of repayment.
The repercussions for borrowers
In October 2023, as borrowers were encouraged to start making payments, the Education Department had temporarily protected borrowers from the penalties of non-payment. That cushion will be removed in May. Therefore, loan servicers will now begin reporting late or missed payments to credit bureaus. This means if people fall behind on their student loan payments, credit scores will take a quick and serious dive.
“It hits credit scores like a sledgehammer,” said Michael Ryan, a financial expert from MichaelRyanMoney.com. Each loan missed counts as a singular negative mark, so a borrower with multiple loans may see his score drop anywhere from 50 to 130 points in one report.
Why are credit scores more important than ever?
A low credit score can bring in undesirable consequences not only for student loans but also for others like renting an apartment, getting a car financed or opening credit cards, and sometimes even a job. Ryan said, someone with a score of 760 might be dragged into subprime territory around 590 – which means very, very hard for them practically speaking to hit many of these financial milestones.”
According to Schulz, many Americans are already stretched incredibly thin due to inflation and high-interest rates. “Add another big loan payment into that mix, and it gets really tough.
Possible garnishments and default alongside recovery
Besides credit damage, borrowers facing default will have to deal with wage garnishments, which could happen beginning this summer. These punitive measures, which were suspended during the pandemic, are now reinstated within the Trump administration’s framework for enforcing repayment and alleviating the burden on taxpayers.
As education secretary Linda McMahon said, “This change has bearings on the constitutional limits of federal forgiveness policies:” American taxpayers will no longer be forced to serve as a collateral for the irresponsible student loan policies.” Repayment is now a legal duty that should be followed.
The vast expanse: Credit scores and the economy
The reverberations could well extend into the wider economy. With credit scores falling, fewer Americans will henceforth qualify for loans or favorable interest rates. “Credit scores will be decimated,” noted Kevin Thompson, CEO of 9i Capital Group, especially for borrowers who fall behind by more than 90 days.
According to Financial Literacy Instructor Alex Beene, the disruption in monthly payment patterns, and the dissolution of the promise of loan forgiveness, has caused many borrowers to delay action. But now the clock is ticking.
What borrowers can do now
Loan status checking and income-driven repayment options are just some of the things urged as reporting resumes on May 5. Experts advise immediate action to avoid bad credit, wage garnishment, or default.
For most, this represents a terminal point in what was usually a short phase of respite from the rigors of adult life: the beginning of a more stringent, more nail-bitingly consequential repayment epoch.
