Paused student loan payments may have been one big reason Americans' credit scores improved in the last three years.
The average credit score for consumers rose by 15 points during that time, while those with blemished credit saw their scores increase by 30 points, Tom Aliff, risk advisory leader at Equifax, told Yahoo Finance Live (video above).
"Now, when we consider what were the drivers behind that, federal stimulus played a major role in the consumer's ability to pay down delinquencies, pay down their utilization, pay down their balances," Aliff said. "While those consumers have not had to make those payments, they were able to distribute that payment and money elsewhere and there was some improvements in some credit scores as a result."
During the pause — which started in March 2020 and ends next month — 79% of borrowers used the money that would've gone toward student loan payments to meet other financial goals, such as paying down other debts (40%), growing their savings (37%), increasing their investments (28%), or saving up to buy a home (24%), according to a survey from US News & World Report.
With student loan payments set to restart in October, borrowers will no longer have that extra cash flow to go to other debt obligations that helped to prop up their credit scores.
"So once those payments resume, there is going to be a higher monthly payment that will exist and depending on the consumer, it could range $100 to $500 to potentially more," Aliff said. "From an immediacy standpoint, there will be some impact. Any time you have a new payment that comes in, it will have some impact."
A recent TransUnion study found that about half of borrowers will have to pay more than $200 a month when payments restart and about 1 in 5 will see payments of more than $500.
Currently, Americans save on average 3.5% of their income, down from an average 7.5% between 1981 and 2019, so dipping into savings may not be an option to cover the shortfall. Many student loan borrowers also took on new debt during the pandemic, including mortgages and car loans.
In fact, more than half (53%) of borrowers got a new credit card, over a third (36%) took on an auto loan, and 15% now have a mortgage or personal loan, the TransUnion study found.
"For many consumers, their total monthly payments today, without student loan payments, exceed what they were paying in aggregate in 2020 prior to the pause," Liz Pagel, senior vice president of consumer lending at TransUnion, said in an email. "Adding the new payments to the mix will be a noticeable payment shock."
While Aliff suggested that borrowers could consider loan consolidation and other repayment options, the government is also giving them an on-ramp for payments. The Department of Education won't report late and missed payments for the first 12 months — sparing borrowers from any credit score ramifications — but interest on those payments will still accrue during that time. Still, once reporting begins, that could hurt borrowers' credit scores if they miss payments.
"Delinquencies are being delayed in terms of their reporting, [but] delinquencies are the most impactful components of a consumer's credit profile that impacts their credit score," Aliff noted.
As borrowers navigate repayment options, they should go to the Federal Student Aid website, StudentAid.gov, to find out who their loan servicer is, how to consolidate federal student loans, and how to enroll in an income-driven repayment plan.
Ronda is a personal finance senior reporter for Yahoo Finance and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda.