The blog of the Urban Institute
October 6, 2020

The Student Loan Pause has Improved Credit Scores, But Not Financial Distress

October 5, 2020

Since late March, most federal student loan borrowers have had expected payments and collections on their loans paused and interest set to 0 percent. This pause has resulted in improved credit scores but has not substantially changed indicators of financial distress, such as holding utilities collections debt.

Payments and collection actions on US Department of Education–held student loans, which make up the majority of student loans, have been suspended because of the pandemic, and loans are not accruing interest during this time. This pause, implemented by the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, is intended to provide financial relief for student borrowers and has been extended to the end of the year by executive action.

The financial effects of the student loan pause are likely to be different for different borrowers. Some may have seen no change in their finances at all, as a large share of borrowers—about half of Direct Loan borrowers—were not in active repayment on their loans before the pandemic, and some borrowers in repayment were making $0 or comparatively low payments through federal income-driven repayment plans. The impact may actually be most substantial for defaulted borrowers, who are avoiding wage garnishment, tax offsets, and other collections penalties during the pause.

To understand the effects of the pause on borrowers, we look at a sample of credit records collected by one of the three major credit bureaus. We focus on people who had any student loans in February 2020, before the implementation of the student loan pause and most COVID-19 changes, and follow them into June 2020.

Credit scores have increased for student loan borrowers during the student loan pause

A constellation of policy changes related to the pandemic, such as mortgage forbearances, federal stimulus checks, temporary business closures, and moratoriums on evictions and foreclosures, have likely affected personal credit balance sheets. To untangle the effects of these policies from the effect of the student loan pause, we compare student loan borrowers to people in a similar age group who have a credit record but do not have student loans.

Student loan borrowers’ credit scores have increased since the implementation of the student loan pause. The Federal Reserve System calculates that the average credit score for a student loan borrower has gone from 647 in March to 656 in June, largely because predefault delinquencies were “cured” by the federal loan pause, which put all current student loans into deferment. We observe a similar trend in our data.

In our analysis, we focus on borrowers with lower credit scores and find that the share of borrowers with poor credit has gone down across the board from February to June. Younger (ages 18–29) student loan borrowers generally had better credit before the pandemic than their peers with no student loans, and older student loan borrowers were slightly more likely to have had poor credit compared with older nonborrowers. Student loan borrowers ages 30 and older were most likely to see a change in their credit score that pushes them out of the “poor” credit range.

Share of student loan borrowers with poor credit scores from Feb-June 2020

Improvements in credit score may not translate to reductions in financial stress

Credit score improvements facilitate access to credit and better borrowing terms. But the ability to access new loans may not be useful for someone still struggling, especially if their true financial situation has not changed. Credit bureau data are one of the few resources we have for looking at the effect of the student loan pause, but these data cannot give us direct information on a person’s immediate financial status, such as changes in income or job loss.

To assess whether distressed student loan borrowers are actually experiencing an improvement in finances, we look at the share of borrowers with utilities collections debts, which typically indicate financial distress (PDF). As many companies and localities implemented disconnection moratoriums in the spring, our results generally indicate whether a person has taken action to remedy a preexisting debt.

We find that the likelihood of carrying utilities debt has declined slightly from February to June, but outcomes largely look similar between student loan borrowers and nonborrower peers. We find similar results for medical collections debt (another indicator of financial hardship), with small reductions in the share of people holding these debts, but no substantial differences between student loan borrowers and nonborrowers.

Share of student loan borrowers with utility debt from Feb-June 2020

Will credit changes yield broader financial relief for borrowers?

This early evidence from credit data suggests the student loan pause has improved student loan borrowers’ credit records. But we don’t yet see evidence that student loan borrowers who were struggling before the pandemic have seen substantial improvement in remedying collections debt, relative to nonborrowers. This could be, as noted above, because of the null impact for those who weren’t in active repayment, as well as other financial stresses induced by the pandemic.

When moratoriums on debt collections eventually lift and the credit effects of the pandemic start hitting consumer credit records, we will have a fuller picture of how the student loan pause—which will be in place for least nine months—has helped financially struggling student-loan borrowers. For now, we observe a positive effect on credit scores but don’t have an indication of a substantial changes in collections debts. 

A student wears a face mask to protect against COVID-19 as he leaves the campus of the UCLA college in Westwood, California on March 6, 2020.(Photo by MARK RALSTON/AFP via Getty Images)

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