Credit Scores, Student Loans, and Planning for the Long-Term Outlook

Since 1989, credit scores have been used as a reliable, standard metric of Americans’ credit health. Banks and other lending institutions look to credit scores to assess risk before granting access to services such as home and auto loans, lines of credit, and other financial services. Data going back to the inception of credit scores shows that the nation’s average credit score, while making small increases or decreases from year to year, has, on the whole, steadily risen. For example, compare the average credit scores in the United States in October 2006 and October 2021, which were 688 and 716 respectively.

While the average credit score today remains in the “good” range (scores from 670-739), there is an elephant in the room that may impact how that average will evolve in years to come, particularly among younger Americans: student loan defaults.

Today’s young adults are making significant borrowing decisions at an earlier age than previous generations. Ranging from tens to hundreds of thousands of dollars, these loans are taken out at a time when most borrowers’ financial literacy is still very much in development. A critical look at the state of education financing is a discussion for another time and place, but it is undeniable that these loans have a significant impact on borrowers’ long-term financial health — one which young borrowers may not yet be equipped to fully appreciate. Indeed, as of the writing of this article, over 42 million American borrowers hold approximately $1.6 trillion of student debt. Of those, over 5 million borrowers are currently in default. And as student loan collections efforts ramp back up following the pandemic, the Federal Reserve estimates that approximately 9 million Americans could face substantial drops in their credit scores.

Interestingly, the defaulting borrowers who face the most severe consequences may be those who currently have the highest credit scores. Since those with high credit scores do not have many marks on their report, a missed student loan payment could have a severe impact. In fact, a TransUnion analysis estimates that those with super prime credit scores could see a drop of 175 points due to default, whereas someone with subprime credit would see an average drop of 42 points. “[A]lthough some of these borrowers may be able to cure their delinquencies,” the Federal Reserve researchers said, “the damage to their credit standing will have already been done and will remain on their credit reports for seven years.”

According to recent data from the Federal Reserve Bank of New York, more than 2.2 million American borrowers have experienced a credit score drop of more than 100 points from January to March 2025, and another 1 million borrowers experienced credit score drops of at least 150 points for the first three months of 2025. Further, some 2.4 million of newly delinquent borrowers facing these drops previously had credit scores above 620, which is considered a “good” score — one that would typically qualify a borrower for new loans, mortgages, and credit cards.

So, what happens when too many of the desirable borrowers disappear? It does not take a crystal ball to predict that a broad decrease in credit scores could result in a shrinking population of creditworthy borrowers, which in turn could lead to drops in earnings and asset growth for banks. Today’s 22-year-old college graduates are the borrowers we expect to take out larger mortgages and business loans 15-20 years from now. But what if the assumptions change and that modeling is no longer accurate? Like any other business, banks are dependent on generational turnover among their customers. If late Millennials and members of Gen Z enter their prime entrepreneurial years already saddled with poor credit ratings and higher debt servicing obligations, they won’t qualify for those high-dollar loans, and the resulting generational customer gap could translate into a very real hit to bank balance sheets.

It could also mean young professionals turn to less conventional financial services providers over traditional commercial banks, potentially forfeiting critical points of financial literacy development that banks have helped facilitate (both formally and informally) for decades. Customers may end up unbanked or underbanked, thereby lacking the access to credit that helps them build self-sufficiency. We already know that younger generations think differently about financial services than their forebears, and banks need to adapt to engage and remain relevant. Banking is about relationships, and losing the early years of relationship-building with young customers nips in the bud what could otherwise grow into mutually beneficial business relationships down the road.

In many respects, these are macro issues that will require macro solutions. For now, banks should continue to monitor the credit market as well as their customers who are at the greatest risk of facing severe credit hits due to student loan default. Lean into financial literacy programs and remember that investing in young people who may not be high-dollar customers today can pay great dividends down the road. Finally, banks should continue to keep an eye on Congress, as some upcoming legislation may affect customers with student loans.