Written by: Erica Sandberg
Edited by: Lillian Guevara-Castro
Reviewed by: Adam West
The Federal Reserve Bank of New York recently released what at first glance seemed like optimistic numbers.
In the first quarter of 2025, credit card balances fell by $29 billion from the previous quarter, and now stand at $1.18 trillion. With the economy in flux and inflation concerns still high, it seems consumers took positive steps to gain control over their financial obligations by pulling back on excess charging.
Yet ominous news quickly followed and may taint the positive outlook for lenders. Student loan balances soared by $16 billion, and are now totaling $1.63 trillion. Along with car loans and mortgage debts, the final tally for aggregated U.S. household debt is currently around $18.2 trillion.
Adding to the alarm from the Fed report is the acknowledgment that there has been a substantial uptick in student loan balances going from current status to delinquent.
This puts financial institutions in a challenging spot. Not only do many people who have student loans owe tens of thousands of dollars (and sometimes far more), a substantial number of them are falling behind on those payments because they can’t afford the monthly outlay. Consequently, to credit card issuers, they are riskier customers.
What’s Going On With Student Loans
In 2020, the U.S. Department of Education offered temporary relief for student loan borrowers with the COVID-19 Emergency Relief and Federal Student Aid program. It provided forbearance for required payments, waived interest, and suspended collections on defaulted loans.
That relief began to fade in 2023, when interest started to accrue on federal student loans in September and payments resumed in October. Now collection activity on most defaulted loans has also resumed.
The U.S. government had also hit the pause button on bad student loan debts being reported to the three consumer credit bureaus, TransUnion, Experian, and Equifax. They were noted as “current” instead of “in collections” on peoples’ files.
But as of Jan. 1, 2025, these loans once again started to appear on peoples’ credit reports, and in accurate ways. As a result, when borrowers didn’t have the means to make their payments, the delinquencies began to show up on their credit reports, as did loans in default.
Since credit scoring companies such as FICO and VantageScore use the information that appears on credit reports to create credit scores, the combination of high debt, late payments and defaulted loans have caused credit scores to plummet.
According to the May 2025 TransUnion analysis, student loan borrowers who experienced recent student loan default watched their credit scores drop an average of 63 points. The impact is even more severe on people with higher credit scores, who had further to fall and saw their numbers decline by as much as 175 points.
Majoring in Student Loan Balances
The average federal student loan debt balance is currently $38,375, according to the latest figures from Education Data. Add in private student loan debt and the average debt may be as high as $41,618. Other data collected by Education Data found the average estimated monthly student loan payment is $536.
These balances stick with the borrower until they are repaid, too, as It is extremely difficult to discharge student loans in personal bankruptcy. The average borrower takes more than 20 years to repay their student loan debt.
These obligations also become priorities when comparing them to credit card balances because the ramifications for not paying them are more severe.
In addition to the credit damage caused by missed payments, a defaulted borrower may experience wage garnishment, an offset of tax refunds, lawsuits, and becoming ineligible for future federal student aid and Pell Grants.
This becomes a quick lesson for consumers. In light of the expensive problems associated with defaulted student loans, they may choose to concentrate on paying student loans instead of their credit card debts.
Clearly student loans are causing headaches for both consumers and credit card issuers.
Many consumers may not be good candidates for new credit cards or higher credit lines, and, without guidance, existing cardholders who are holding student loan debt may begin to borrow more than they can afford, then fall behind on their card balances as well.
Credit Issuers Need to Prepare and Adjust
Not being able to meet student loan payments is scary for consumers. No one wants to experience collection activity or have credit scores so low they can’t qualify for the products they need or want.
It’s also bad for card issuers, as they face greater lending risk. But there are steps they can take to mitigate the situation:
Tighten Underwriting for At-Risk Borrowers: Reassess credit score thresholds and debt-to-income ratios and incorporate student loan status more heavily into risk models.
Enhance Risk Modeling and Early Warning Systems: Monitor real-time payment behavior for signs of distress and use AI to identify at-risk customers before missed payments occur.
Adjust Credit Line Management: Freeze or reduce credit limits on accounts showing signs of stress and avoid proactive limit increases for borrowers with student loan exposure.
Proactive Customer Engagement: Send early outreach communications to subprime cardholders with student loans and offer flexible payment options, hardship programs, or budgeting tools.
Offer Payment Relief or Forbearance Options: Develop targeted programs for subprime borrowers juggling multiple debts and consider temporary interest waivers or deferral options.
Expand Financial Literacy and Repayment Support: Provide education around prioritizing debt and avoiding default and partner with student loan servicers or nonprofit advisors.
Monitor Regulatory Shifts: Track policy changes that may delay or accelerate student loan repayments and prepare for potential credit reporting changes or new protections.
Watch for Contagion Into Other Loan Products: Monitor auto, personal loan, and BNPL performance for crossover stress, and review cross-product risk correlations in the subprime segment.
Early action is recommended. Some have already jumped in to mitigate problems. In 2023 the National Credit Union Association warned of the dangers that resumed student loan payments would have on financial institutions.
The good news is (really) that credit cards can be positive tools for consumers who are experiencing financial stress due to student loan issues.
Properly managed accounts can help consumers increase credit scores that have been lowered by missed payments and defaulted loans.
All financial institutions should make sure cardholders know that by keeping revolving debt low compared to their credit line and making all payments on time they can mend credit damage. Not only is this great evergreen advice, it can put consumers in a better position to get problematic student loans under control.
