Student loan ‘shock’ could hurt credit scores of some would-be homebuyers
For nearly five years, Americans with federal student loans were able to skip payments with no hit to their credit score.
Now that the pandemic pause is over, those payments are again showing up on credit reports — a change that could adversely affect scores for past-due borrowers, according to a new VantageScore analysis.
A lower score might keep some borrowers, including would-be homebuyers, from qualifying for new credit and better interest rates.
How will credit scores change as student loan payments restart?
About 9.2 million federal student loan borrowers were behind on payments as of February, and those payments are set to be reported as delinquent between February and June of this year, according to VantageScore. In another twist, last month’s ruling blocking the Saving on a Valuable Education (SAVE) Plan could impact an additional 8 million borrowers benefiting from forbearance.
For the 9.2 million borrowers, a reported delinquency could drive credit scores down significantly — up to 129 points, according to VantageScore.
In addition, some 2.1 million borrowers with credit scores in the “prime” range, or 661-780, could fall out of that category. If that happens, those borrowers might no longer qualify for the best possible rates on loans, or a loan at all.
Dr. Rikard Bandebo, chief economist at VantageScore, sees a “student loan delinquency bomb” coming.
“This is going to be a shock to the system,” Bandebo says.
The news isn’t all bad, however. Most borrowers won’t suffer anything like the 129-point projection. In fact, borrowers who’ve been paying their student loans on time should see their scores improve.
“The majority of borrowers who continue to make student loan payments are already seeing positive impacts to their VantageScore credit scores,” Bandebo says.
All told, by this summer, the national average credit score is expected to decrease by just 2 points, from 702 to 700. That’s not enough to hurt the typical mortgage borrower’s application.
Why credit scores matter for homebuyers
Your credit score is one of the most important determinants of whether you qualify for a mortgage and, if so, how much you’ll pay for it. The higher your score, the better chance you’ll have of being approved and the more affordable your rate.
Borrowers with a score of 780 or higher tend to qualify for the best rates, but you can be eligible for a loan with a score as low as 620 or even 580 or lower, depending on the type of mortgage you’re getting and other factors.
If you’re planning to buy a home and have student loans that were in pandemic forbearance, it’s important to be proactive to minimize any impact to your score. Bandebo suggests contacting your student loan servicer as soon as possible to learn your options.
Don’t rush to apply for a mortgage before any delinquency hits your score, either.
“You’re unlikely to go from preapproval all the way to closing before this hits your score,” Bandebo says. “The best thing to do is to call your servicer right now and see what you can do to avoid a delinquency appearing on your report.”
