For aspiring homeowners carrying student debt, the financial landscape is shifting—and not in their favor.
With federal student loan protections set to expire, many borrowers are confronting the challenge of resuming payments in the face of a looming recession and continued inflation, making the cost of living even more expensive than ever before.
And for those hoping to secure a mortgage, a delinquent student loan will mean a serious hit to their credit score, putting their homeowner dreams at risk.
Student loan protections expire, credit scores set to plummet
After a five-year pause initiated during the COVID-19 pandemic, federal student loan payments for those in default are set to resume on May 5, 2025. The Trump administration’s Department of Education announced the end of zero-interest deferments and lenient repayment terms, labeling previous policies upheld by the Biden administration as “dishonest.”
“These actions will move the federal student loan portfolio back into repayment, which benefits borrowers and taxpayers alike,” Education Secretary Linda McMahon said on April 23 in the announcement.
It was President Donald Trump who paused collections on student loans at the beginning of the pandemic during his first term.
More than 40 million Americans hold student loans, and roughly 5 million are already in default, according to the Department of Education.
Now, approximately 1.8 million delinquent borrowers will be placed on repayment plans, and loans in default will be sent to collections. Those unable to pay face wage garnishment, loss of tax refunds, and most especially, damage to credit scores, a critical factor in securing a mortgage.
“A borrower’s credit score can impact whether they can secure a mortgage loan, and what interest rate they are offered,” explains Realtor.com® senior economic research analyst Hannah Jones. “Improving one’s credit score from bad (under 600) to very good (750–800) can lower one’s mortgage rate by 39 basis points.”
“Many folks have stated that their student debt is one of the big reasons for why they don’t own a home. Their debt-to-income (DTI) ratio is often too high,” explains Sabrina Calazans, executive director of the Student Debt Crisis Center.
The impact of student loan protections ending on homebuyer credit scores
The impact of student loan debt on homebuyers was reviewed by the National Association of Realtors® in 2021, who found that nearly one-quarter of all homebuyers—and 37% of first-time buyers— had student loan debt, with an average amount of $30,000.
According to the NAR study, 51% of all student loan holders said their debt delayed them from purchasing a home, with 61% of non-homeowning millennials saying that student loan debt delayed their ability to buy a home.
When these student loan protections end, those 1.8 million delinquent borrowers will watch their scores drop, possibly low enough to put them out of range for a mortgage for years to come.
Lenders typically require a minimum credit score of 620 for conventional loans. Higher scores can secure better interest rates, while lower scores may lead to higher rates.
According to Experian data from Q3 2023, the average FICO score among Generation Z (aged 18–26) was 680, while millennials (aged 27–42) averaged 690. Research economists for the Federal Reserve Bank of New York’s Research and Statistics Group estimate that a new student loan delinquency could reduce a person’s credit score between 87 to an astounding 171 points.
This dramatic change would put borrowers in these two generations almost completely out of reach of getting a mortgage.
(New York Fed Consumer Credit Panel/Equifax)
How to buy a home while juggling student loan debt
To be clear: Homebuyers with student loans can still qualify for a mortgage; being 100% debt-free is not crucial to buying a house. However, if your student loan has been in default and now you’re facing paying it back, there are options to improve your credit score.
Resume payments promptly: The best-case scenario is that you start the process of prioritizing paying off the loan.
“Indebted student loan consumers should budget their student loan payments back into their monthly expenses,” advises Leslie H. Tayne, finance and debt expert and founder of Tayne Law Group. “Aim to make on-time, consistent payments to keep a high credit rating once student loan payments resume.”
Monitor your credit reports: You’ll want to be regularly checking your credit reports as soon as your loan payments go back into effect.
“It’s critical that all student loan borrowers monitor their credit reports during this time, ensure all transactions and score adjustments are accurate, and dispute any errors or inaccuracies through the credit bureaus,” adds Tayne. “I recommend annualcreditreport.com for regular credit checks, or request a free annual credit report from TransUnion or Equifax or Experian.”
Increase your income: Along with your credit score, lenders will calculate your DTI ratio when considering your application. If you can prove that you have an increased source of steady income, that could go a long way toward securing a loan. Consider a side hustle or even adding on some overtime, if available to you.
Apply for a mortgage with a co-borrower: If your parents were up for taking out loans to help you with your education, maybe they won’t mind co-signing on your mortgage as well. If someone else is on the mortgage application, their DTI and credit score will be considered alongside your own. But this works only if their numbers are better than yours.
