How much does missing student loan payments hurt your credit score?

A U.S. freeze on federal student loan payments during the COVID-19 pandemic has offered a vital financial reprieve to millions of Americans. But borrowers could soon be on the hook again, with the moratorium set to lapse at the end of the month. 

More than 79% of those with student debt — a total of 30 million people — saw their credit scores improve during the pandemic, according to a report this week from the Federal Reserve Bank of New York. Nearly 8 million borrowers boosted their scores enough to jump to a higher credit tier. 

"The pandemic repayment pause drastically reduced delinquency and default on student loans, so we've seen increases in credit scores across the distribution of student debtors," said Marshall Steinbaum, senior fellow in higher education finance at the Jain Family Institute. "Student debtors' credit scores have risen across the board, but they have increased the most for the least well off student debtors."

The Biden administration has yet to make a final decision about whether to cancel student debt for nearly 40 million Americans. Meanwhile, missing payments or defaulting on your student loan can have far-reaching financial consequences. 

"In general, student debt is weighing down the financial well-being of many households and inhibiting them from creditworthiness and all that it entails," Steinbaum added.

How your credit score is determined

Your credit score, which indicates to a lender how likely you are to make or miss a debt payment, is calculated largely based on your payment history. Other factors, like how much you owe on car loans and credit cards and the length of your credit history, also affect your score. The types of accounts you hold and your recent credit activity make up the remainder of your score.  

Generally speaking, this is how your credit score is calculated:

• Payment history (35%)
• Amounts owed (30%) 
• Length of credit history (15%)
• Types of credit accounts (10%)
• New credit (10%) 

So what happens if the forbearance period on federal student loans ends and you're unable to make payments? The hard reality is that missed payments will hurt your credit score. What's less straightforward is how much.

"That's the impossible question. There is no fixed number of points for any event on a credit report," said John Ulzheimer, a credit expert who has worked at Equifax and FICO, two of the largest credit scorers.

If your credit record is pristine, a single late payment can pull your score down drastically.

"If you have a fantastic credit report and all of a sudden you start missing payments, the impact will be more dramatic than if you already had bad credit and started missing payments on student loans," Ulzheimer said. 

Carrying debt is harmless to your creditworthiness as long as you make your payments on time and do not default on the loan. 

"It's really an issue of defaults and missing payments when you start to get into a lot of trouble," he said. 

Credit scores usually range from 300 to 850, with scores of 670 and up considered good to excellent. The average FICO score in the U.S. was 714 in 2021, according to Experian. 

Even a single late payment can seriously tarnish an otherwise strong credit score, reducing it by up to 100 points, according to Ted Rossman, a credit expert at Creditcards.com. On the other hand, if your payment history has already been inconsistent, then a missed payment or two will have less of an impact. 

"If you already have a bunch of late payments and have a lot of debt, one additional late payment wont hurt as much as it would someone with a pristine credit score," Rossman said.

Not surprisingly, defaulting on a student loan will typically cause more damage. 

"It could easily trim 150 or more points off of your score. You want to avoid getting to that point," he said. 

A poor credit score can make it hard to rent or buy a home, buy or lease a car, get a cellphone plan, or even sign up for utilities like electricity and gas. Some employers even check candidates' credit histories.

"Your credit score is one of the most important numbers in your financial life," Rossman said. "It will go a long way in determining whether or not you're approved for loans and lines of credit. 

Worst thing you can do is nothing

Ignoring past-due student loan payments is never wise. 

"If you are in trouble outside of the current forbearance, you definitely want to speak up," Rossman said. "There are options available — your lender can work with you. The worst thing you can do is nothing."

For example, you can ask to be on an income-driven repayment plan, or consolidate your loans into a private plan. On an income-driven repayment plan, your monthly payment is set at a rate that's affordable to you based on your income, typically about 10 to 15% of your discretionary income. 

Here's what isn't an option: Filing for personal bankruptcy, which is barred by law. 

"Federally guaranteed student loans aren't statutorily dischargeable, so it's not really an option. Similar to things like child support, you can't discharge that stuff in bankruptcy," Ulzheimer said. 

But there are workarounds. For example, you can use a home equity or personal loan to pay off your student debt first, then declare bankruptcy and have the other loans discharged.