Only 1 in 3 Borrowers are Paying Student Loans, Shaking Up Risk Models

Delinquencies on student loans are quickly accumulating — and the trend spells trouble for subprime lenders and credit score models. Only one-third of borrowers are currently paying their student loans, and millions are skipping payments altogether, according to reports by Bloomberg and PYMNTS.

In August of 2025, more than 10% of federal student loans were 90+ days behind in payments, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data.

Meanwhile, even borrowers with strong credit have seen their scores drop due to late payments — some by as many as 175 points, according to MarketWatch.

But this disruption does not end with student loan servicers. Credit providers that rely on traditional credit scores are unwittingly lending to higher-risk consumers, who are largely young individuals already managing financial instability.

Now that federal collections have resumed and some payment plans are unwinding, lenders would be wise to prepare themselves for spillover. Borrowers who are behind on student loans may soon be delinquent on cards, motor vehicle notes, or other unsecured lines of credit.

Delinquencies Increase — And So Does Risk

Delinquencies began to rise again as payments on student loans restarted promptly in late 2023. In mid-2025, the level took a dramatic turn upward. Over 10% of federal loans are now more than 90 days delinquent — a 31% spike from the previous quarter, says PYMNTS.

Those most affected are borrowers from lower-earning households, many of whom are forced to the brink to get by and eat or pay rent. Debtors are missing payments more due to exasperation with plans of frozen forgiveness, as well as distress.

That behavior has many implications for lenders going after the near-prime or subprime consumer: A single missed student loan payment can push a borrower below qualification thresholds within hours, regardless of their broader credit history.

Student Loans May Distort Credit Reports

Industry-standard scores like FICO and VantageScore still batch student loan delinquencies in with other installment loan delinquencies. That practice may no longer reflect reality. A borrower who has good payment habits elsewhere could still experience a credit free fall if they miss an installment payment on a single loan.

These distortions complicate risk assessment for underwriters. Lenders risk skipping over qualified borrowers while inadvertently approving those on shakier ground.

This is notably more problematic among young borrowers. Gen Z and young millennials are still becoming familiar with the nuances of financial adulthood in a costly economy. They are juggling student loans with skyrocketing rent, costly groceries, and unstable job markets.

More recent data from surveys indicates many of them are putting necessities before everything else, which means missing payments on loans to ensure the fridge remains filled up. This shift in behavior undermines the accuracy of forecasts based on outdated repayment assumptions.

Strategic Direction for Subprime Lenders

To keep their edge, lenders may need to rethink their models and tools. That might entail:

• Enhancing behavioral analytics to catch issues before they lead to default episodes
• Offering payment relief or a short-term restructuring to level distressed accounts
• Augmenting scores with real-time cash flow analysis to better capture long-term affordability
• Supporting reforms to appropriately incorporate student loan delinquencies into risk assessments

Others are already using alternative data — such as income-based repayment plans or bank statement patterns —to get a more accurate picture of borrower stability.

As defaults mount, such instruments are assuming more central roles in credit determination, and lenders are better positioned to understand behavior where credit report distortions exist.

AI lenders Upstart and Pagaya are doubling down on such strategies. Their algorithms are designed to uncover repayment strength even when scores are missing. That may prove useful if student loan stress persists and distorts traditional credit histories.

Policy Changes May Decide the Fate of Borrowers

Collections were officially back on track in May, and thousands of borrowers are now subject to wage garnishments for the first time in recent memory. Meanwhile, more than 1,000 colleges are at risk of losing federal funding due to student loan default rates reaching historic milestones.

That may drive more students into private lenders that offer fewer protections and more expensive terms — and often serve the same credit-challenged constituents. 

Lenders and bureaus both face potential direct impacts from future federal guidance on loan pricing and credit scoring. A key debate centers on whether to recast or isolate pandemic-era delinquencies to avoid long-term harm to younger borrowers.

Industry associations are pushing for model changes to maintain credit access while protecting borrowers who default due to hardship. The larger picture — how credit scores evolve, how lenders adapt, and how policymakers respond — could redefine access to credit far beyond the student lending market. 

For now, this much is certain: Repayment patterns have changed, and lenders who choose to ignore this risk do so at their own peril.