Millions of student loans are in default. Act now to save your credit

Before ringing in the new year, millions of Americans may want to check in with their student loan servicers because they may be on the soon-to-be reported default list, experts said.

More than four million Americans are technically in default, or at least 270 days overdue, on their student loans, said Michele Raneri, vice president and head of U.S. research and consulting at TransUnion. They just haven’t been reported to the credit bureaus yet for various reasons, including processing lags, she said. When they’re finally reported, there could be almost 10 million borrowers, or almost 25% of the federal student loan portfolio, in default, the Department of Education said. That would be a record, experts said.

If borrowers don’t act quickly to ward off being reported to the credit bureaus, their credit scores will plummet and they could see their wages, Social Security benefits and tax refunds garnished.

“Borrowers have been falling behind since payments restarted post-pandemic, but those delinquencies won’t fully show up in federal reporting until 2026,” said Kaydee Ambas, Consumer Finance Professional at Earnest, a platform that connects students to private loans, refinancings and scholarships. “The strain is already here. What looks like a 2026 cliff is actually a reporting lag.”

More borrowers are pushing off payments

The first day a payment becomes past due, or delinquent, it remains that way until the past due amount is paid or other arrangements like changing repayment plans or getting a deferment or forbearance are made.

Once a payment is 90 days or more late, the delinquency will be reported to the national credit bureaus, which can negatively impact your credit rating. In May, credit scoring agency FICO said Americans’ average score shed two points from a year ago due to a jump in 90+ day, or serious, delinquencies to above pre-pandemic levels for the first time.

Serious delinquencies reached a record high of 30.6% in March, Raneri said. It’s since slipped back to 28.5% but remains elevated.

Transitions into serious delinquency rose to 14.3% from July to September, compared to 12.9% in the prior three months, 8% in the first three months of the year and 0.8% at the end of 2024, the Federal Reserve said.

“That is the fastest transition rate into serious delinquency since the data have been collected, going back to 2000,” said Matthew Nestler, KPMG senior economist. “It means more borrowers are moving on from early-stage delinquency without making any payments.”

What happens if borrowers can’t pay?

Americans who have been reported 90+ days late on their loans have already seen their credit scores drop 60 points, on average, Raneri said.

Lower credit scores have lasting effects. Lenders use them to decide whether to approve loans and credit cards, and to determine interest rates and credit limits.

“People are most upset when they want to get a house,” Raneri said. “They saved some money, did their research, finally found one within budget, but when they go to get a mortgage, they find out their score’s too low. That’s something that will take a while to bring back up so it’s a missed opportunity.”

Meantime, borrowers will face hefty collection fees, garnished wages and maybe, seized Social Security payments and tax refunds, which would most hurt very low-income households. “These seizures compound financial hardship for those who can least afford it,” The Institute for College Access and Success, a nonprofit advocate, warned in a report.

“The pain isn’t evenly distributed,” Ambas said. “Older borrowers, people on fixed incomes and borrowers who never finished their degree are facing the highest repayment stress.”

Borrowers with a student loan in default also lose eligibility for new federal student aid and won’t qualify for federally backed mortgages due to being flagged in the government’s credit reporting system.

What should borrowers do?

If you’re on the verge of serious delinquency, “the biggest mistake is waiting too long,” Ambas said. “As soon as you think you might miss a payment, reach out — getting ahead of it opens up options that disappear if you fall behind.”

Borrowers should review other payment plans that might better match their cash flow, experts said.

Also, “consolidation can be a smart move for borrowers pursuing Public Service Loan Forgiveness (PSLF) or trying to lock in access to current income-driven plans before the new rules take effect,” Ambas said. “For credit-strong borrowers, refinancing can lower monthly payments or interest costs. It’s not right for everyone, but it can provide short-term breathing room while people stabilize their finances.”

For help, borrowers, especially those on the brink of default, should call their loan servicer immediately, experts said.

“When people are late, it’s uncomfortable to make that first phone call,” Raneri said. “But you’ve got to make yourself do it and start talking to someone to find a way to work it out with the servicer. Don’t let it just happen and then, see a lower credit score.”

If you haven’t yet been reported as in default, “see this as your grace period to contact your servicer to figure it out,” Raneri said. “Get some funds to help straighten it out and save yourself from a credit score hit.”

Maybe, even ask friends and family for help paying student loans instead of splurging on a holiday present for you this year, she said.

Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.