Mortgage Research Network Podcast

Welcome to the Mortgage Research Network Podcast. Just a note that this podcast audio is AI-generated, but the article on which it's based was produced by people. Content is also reviewed for accuracy. And your hosts, Tim and Craig, are real people. Without further ado, let's get into today's topic.
I'm your host, Tim Lucas, editor of MortgageResearch.com and a former mortgage professional, and with me is Craig Berry, a mortgage originator with 25 years experience.
Hi everyone. Thanks for being here.
Today we're talking about the recent restart of federal student loan repayments, and the effect on peoples' credit reports. Craig, take us through what's happening.
Well, a over five million Americans just saw their credit scores impacted, about 2 million experiencing 100-point drops, according to ABC News.
Those numbers are staggering. And what's really interesting is how this isn't following the pattern we might expect. it's not just young graduates being affected.
You're right. the data shows that borrowers aged 40 and older are actually struggling the most. A quarter of those over 60 with student loans are in default. That completely flips the script on who we think of as having student debt problems.
So what exactly happened when this payment pause ended? The timing seems crucial here.
Well, we had this 43-month pause during the pandemic where delinquency rates were below 1 percent. That pause ended in September 2023. Then there was an on-ramp until October 2024, when late payments wouldn't affect credit scores. The one-year on-ramp expired, and BOOM - the impact was immediate. We're talking about 2.2 million people seeing their scores drop by 100 points, and another million dropping by 150 or more.
The way this affects different credit score brackets is fascinating too.
Oh yeah, the numbers tell quite a story. If you had a score below 620, you took an average hit of 74 points. But if you were in that 620 to 719 range? You're looking at a 140-point drop. And here's the real kicker - those with excellent credit scores over 720 saw an average plummet of 177 points.
That's enough to knock someone from prime mortgage territory into the subprime category overnight.
And what's particularly concerning is the geographic distribution. The South is getting absolutely hammered by this. Mississippi has a default rate of nearly 45 percent, while states like Alabama, West Virginia, and Kentucky are all hovering around 34 percent.
Tnd then you look at somewhere like Illinois with only 13.7 percent. that's quite a contrast.
Exactly. And this regional disparity is creating what economists are calling a "perfect storm" for housing markets in these affected areas. Think about it. when you have nearly half of student loan borrowers in default in a state like Mississippi, that's going to have serious ripple effects on the local housing market.
Well that raises an interesting question. how exactly does this affect someone's ability to get a mortgage?
It's actually a two-pronged problem. First, you've got the obvious credit score impact, which either disqualifies you entirely or forces you into much higher interest rates. But there's also this hidden impact through wage garnishment. when your wages are being garnished for student loan payments, that makes your debt-to-income, or DTI ratio worse.
And lenders are inflexible about those ratios?
There's some flexibility, but at the end of the day, a computer underwriting system makes the decision. But there are hard cutoffs. So if you're above a certain DTI threshold, it doesn't matter if you have a perfect payment history otherwise - you're not getting that loan. And here's what makes this situation even more complex: the assistance programs that are supposed to help are completely overwhelmed.
You know, this really challenges the narrative about student debt being primarily a young person's problem.
Right? The data shows that 18-29 year olds actually have the lowest default rates. This is increasingly becoming a mid-career and even retirement-age issue. And that has huge implications for generational wealth building.
How so?
Well, think about it. if people in their 40s and 50s can't qualify for mortgages or are forced to pay much higher rates, that affects their ability to build equity for retirement. Plus, it impacts their ability to help their own kids with college, potentially perpetuating this cycle of debt.
That's a pretty sobering outlook for the future of economic mobility in those affected regions.
And what's particularly troubling is how this could exacerbate existing economic disparities between regions. When you have states with drastically different default rates, you're potentially looking at a widening gap in homeownership rates and wealth building opportunities.
So what's the path forward for people caught in this situation?
There are options. income-driven repayment plans, the SAVE plan, and loan consolidation. but accessing these programs isn't easy. People are reporting hours-long hold times and crashed websites. It's a system that clearly wasn't prepared for this volume of need.
Looking ahead, do you think this might force some broader changes in how we handle student loan financing?
You know, it has to. When you see default rates this high, especially among older borrowers, it suggests there are fundamental problems with the system. It might have people question whether college is worth it in the first place. And if it is, maybe it's worth finding lower-cost solutions. Unfortunately, it's too late for those with large student loans currently. Luckily, a lower credit score isn't permanent. People can get back on track with their payments and build their credit scores again.
Right. It's never too late to work on getting back that high credit score you used to have. Thanks for taking us through this topic, Craig. That's about all the time we have for this topic, but we go into even more detail on the site. To learn more, go to Mortgage research.com and type [topic] in the search bar on the homepage. We'll see you next time on the Mortgage Research Network Podcast.