Written by: Eric Bank
Edited by: Lillian Guevara-Castro
Key Takeaways
- Delinquencies are up: New TransUnion numbers show that 20.5% of people who owe a payment on an account are at least 90 days late, which is not quite double pre-pandemic levels.
- Credit scores are declining: Borrowers hit by this took an average 63-point hit; super-prime borrowers were knocked down 175 points, and subprime borrowers lost 42 points.
- Secondary effects for lenders: An expanding shadow stock of late but as-yet unreported delinquencies would torpedo the portfolios of subprime lenders.
In the surest sign to date that the pause on college loan payments is stuck, TransUnion has published alarming data showing that chronic delinquencies on that debt are both more widespread and deeper than previously understood.
We sat down with Michele Raneri, VP of Financial Services Research and Consulting at TransUnion, for some exclusive commentary ahead of the jarring press release.
The headline that understates the situation, Raneri said, is that 20.5% of student loan borrowers now scheduled to be making payments are at least 90 days late.
TransUnion’s researchers took an even narrower view, analyzing only those borrowers whose payments were due today, excluding those in deferment or forbearance. That reduced sample demonstrated that the effective delinquency rate is nearly double the February 2020 pandemic economy level of 11.5%.
Raneri told us more than 1 in 5 student loan borrowers have been reported as seriously delinquent. And that number could soon be significantly higher.
In fact, TransUnion’s data suggests that a growing backlog of previously unreported, soon-to-be delinquencies is coming to light.
Scores that fall lower will have significant consequences, she cautioned, and the tens of millions of Americans who are defaulting will see their scores drop considerably and it could threaten their ability to access other types of credit.
Credit Scores Take a Nosedive
Borrowers who fell into the 90-day delinquency bucket saw an average hit of 63 points to their credit scores. The analysis was broken down by credit grade.
The super-prime borrowers lost, on average, 175 points — a steep fall for customers who had previously been among the least risky. Among subprime borrowers, the average point loss was 42.
Raneri explained that if you have a super-prime credit score and get a 90-day past due notice, you’re not super-prime anymore. A surprise like that drastically changes a lender’s estimate of risk.
The outlook is just as dire, of course, for subprime borrowers, who already have little access. So, of the people who were in subprime, 50% are now delinquent with a student loan. And with numbers continuing to drop, a lot of them will be below 550, where credit is almost nonexistent right now.
Why the Numbers Are So Confounding
Unlike credit cards or car loans, student loans report on a different schedule. Servicers generally do not report delinquency to credit bureaus until borrowers are at least 90 days late.
The federal on-ramp phase that ran from October 2023 to October 2024 did not penalize borrowers and allowed them to skip payments. The grace period seems to have made matters worse, given that no delinquency was ever listed for those out of payment.
“There’s a lot of confusion. Some borrowers can’t even find who owns their loan anymore.”
Confusion has also been exacerbated by loan servicing transfers, communication breakdowns among borrowers, and the squeeze that inflation has put on household budgets.
“There is a lot of confusion,” Raneri said. “Some borrowers can’t even find who owns their loan anymore. One way to check is to pull a credit report. It will list the loan, servicer, and contact number.”
There Might Be a Bigger Problem Lurking
It should be noted that the reported 20.5% rate of serious delinquency may be only half of the story, according to the TransUnion report. And almost as many borrowers — about 20.8% — appear at least 90 days delinquent by payment behavior, though they have not been previously reported delinquent by servicers.
“We don’t know how many of them will ultimately be reported, but we truly believe that number is going to be much higher than 20% that it is today.”
Raneri calls them the “shadow delinquency” group. Some are asking for deferments or help. The others, presumably, are sitting in limbo.
“We don’t know how many of them will ultimately be reported, but we truly believe that number is going to be much higher than 20% that it is today,” Raneri said.
That has lenders carefully watching their book of loans. “You think you know where the risk lies,” Raneri told us, “but a surprise delinquency can quickly change the makeup of your book.”
Relevance to the Subprime Lending Industry
Subprime lenders will be especially squeezed. Not only have many not experienced continued score erosion, but because of the reporting lags with student loans, a large number of borrowers appear to be on the cusp of defaulting but it hasn’t happened yet.
Lenders should segment credit factors even smaller to uncover riskier consumers before any reported delinquencies. Raneri suggested that with the right data, lenders can predict which of their customers are going to see their credit scores decline in the future and be ready for that.
Some lenders are proactive in contacting struggling borrowers.
“The hard part (for borrowers) is to suck it up and make the phone call and try to work it out,” Raneri said.
But borrowers can use their credit report to identify their servicer and reach out. That’s the first step toward finding help.
Last Words
Though the complete picture of student loan defaults is only starting to come into focus, what is already clear is that it’s bad news for both consumers and lenders.
TransUnion’s recent study gives us just a peek behind the curtain of the true magnitude of the default crisis — and that may only be the tip of the iceberg.
With millions of other borrowers already delinquent, or just on the cusp, the subprime lending industry will need to rethink how it evaluates risk, handles distressed borrowers, and prepares for what is coming next.
