Millions of Americans are going to start repaying their student loans in October. Equifax Risk Advisory Leader Tom Aliff notes that during the deferral period, there was some improvement in credit scores because borrowers could use that money to pay down other debts. Aliff also notes that stimulus payments provided borrowers with a bit of a buffer to pay down some bills too. Aliff says "the greatest impact to a credit score is definitely going to be payment history," however, with delinquency reporting being delayed, credit scores won't necessarily see an immediate impact from a late payment.

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Video Transcript

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JULIE HYMAN: We are continuing our week-long special student loans, smarter strategies, as 43 million borrowers will have to start repaying those loans in just a few weeks. Today, we're talking credit scores. Joining us now with a look at what you need to know about your credit score is Tom Aliff, Equifax risk advisors leader. So, obviously, your student debt, your repayment thereof affects your credit score. What do people need to know, first of all, if they haven't been paying student debt for the past few years, has that had an effect on the credit score?

TOM ALIFF: Yeah, so there's definitely-- when we think about, you know, how credit scores are made up, student loans is one component of that credit score. You described the 43 million consumers that are incorporated within that position, and the things that are taken into consideration for credit score are related to their payment history, you know, the number of accounts they have, the length of file, and utilization. And so while those consumers have not had to make those payments, they were able to distribute that payment and money elsewhere, and so there was some improvements in some credit scores as a result.

JULIE HYMAN: Yeah, what kind of improvements did we see over the last three years? I mean, that seems to suggest just how big of a burden student loans are now that the payments have resumed.

TOM ALIFF: Yeah, so there's definitely been an impact if we go back for the last three years. You know, on average, we've seen approximately about 15 points on average for consumer score increases, and as you move into a more subprime credit status, there was a greater increase of by about 30 points. 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.

And in addition to that, the student loan payments were not incorporated as a part of that, so there was an overall net positive consumer cash flow perspective that were-- that was making that impact. And then things like inflation occurring can also challenge consumer cash flow, as well as things like unemployment.

JULIE HYMAN: Tom, when Equifax is devising the credit score, does it weight different kinds of debt differently? In other words, are lend-- are borrowers dinged more for not repaying, say, student debt versus a mortgage versus credit card debt? How does that all get calculated?

TOM ALIFF: Yeah, the greatest impact to a credit score is definitely going to be payment history, whether it's paid as agreed or not. And more often than not, it's not necessarily a more or less impact. It's more the indicator of was a payment missed that was agreed upon.

AKIKO FUJITA: And so, Tom, you know, there's certainly a lot of people out there who have seen the resumption of their student loans. They're sort of counting on the forgiveness-- that's sort of in question right now. But they can't make a payment, at least as they stand right now. What options do they have?

TOM ALIFF: Yeah, so there's definitely positions to be able to understand, like where should they be making those payments? You know, should they consider things such as a consolidation and find additional ways to obtain cash to be able to make those payments? Now, of course, those things are a little more challenging to, you know, change someone's net income or positive situation as a part of that. But there's many different avenues that consumers can look to leverage to be able to incorporate.

AKIKO FUJITA: And how big of a hit do you anticipate moving forward? I mean, again, as we talked about this yesterday, there's still a lot of questions around, you know, what the Biden administration is now going for their plan B, given the Supreme Court decision. How many will actually have their loans, you know, canceled. But when you think about where things stand right now and those students who haven't had to make those payments for the last three years, I mean, are we seeing those credit scores get dinged, or are we seeing an escalation? What are you expecting?

TOM ALIFF: Yeah, so once those payments resume, there, of course, is going to be a higher monthly payment that will exist, and, you know, depending on the consumer, it could range $100 to $500 to potentially more. And so every consumer is going to have a different impact according to their own personal situation, and a lot of that's going to be driven by their cash flow. Now, from an immediacy standpoint, there will be some impact. Any time you have a new payment that comes in, it will have some impact.

However, delinquencies are being delayed in terms of their reporting, and as I mentioned before, delinquencies are the most impactful components of a consumer's credit profile that impacts their credit score. So as long as those delinquencies have some delay in them, credit scores won't be as impacted. Now they will have impact according to adding these additional payments in.

JULIE HYMAN: Tom, thanks for walking us through all this. Tom Aliff is risk advisory leader at Equifax. Thanks.

TOM ALIFF: Thank you.