Student Loan Delinquencies May Push Millions Into Subprime Credit

Student loan delinquencies are rising rapidly, and the impact on credit scores is dramatic. A recent comparison by Apollo Chief Economist Torsten Slok demonstrates how quickly risk spirals.

Creditworthy borrowers — in particular those with FICO scores in excess of 760 — experience a loss of an average 171 points upon delinquency.

Credit scores drop by about 63 points on average, while subprime borrowers can experience a 42-point loss that often pushes them below 550. At that point, conventional credit is all but unavailable.

The impact extends far beyond credit markets: 45 million Americans carry student loans and roughly 11 million are in default or at least 90 behind on payments.

For lenders, the significance is clear. A sharp fall in scores pushes millions into subprime ranges, cutting off access to conventional loans. Yet demand for credit remains. Borrowers who lose prime status still seek financing, forcing lenders and issuers to rethink risk models and adapt their product strategies.

The warning signs have been building for months. As of April, 31% of federal student loan borrowers were at least 90 days delinquent as reported by their servicer, according to a TransUnion June report.

That represented a sharp increase over the February 2025 figure of 20.5% reported as part of a previous TransUnion analysis in May. This compared to 11.5% in February 2020, near the beginning of the pandemic and the subsequent student loan pause.

By June, missed payments were already dragging scores down, with many subprime borrowers slipping beneath 550.

Even more troubling, TransUnion identified another 20.8% of borrowers showing delinquent behavior not yet reported by servicers — a “shadow delinquency” that suggests the true rate may be much higher. Those risks are now surfacing more broadly.

Adding to the strain, nearly 2 million borrowers are at immediate risk of wage garnishment. That development could stretch budgets further and push delinquencies higher.

TransUnion also noted that more than 6 million borrowers slipped into delinquency between February and April, and one-third of them could fall into default within weeks.

Several forces explain the surge. The federal 12-month “on-ramp” moratorium ended in October 2024, lifting protections that had kept borrowers from being reported as delinquent.

At the same time, servicer transfers and communication breakdowns left many unsure of who even owns their loans. Combined with inflation’s squeeze on household spending, these factors have created a surge of delinquent payments.

Unlike credit cards, student loans typically aren’t reported as delinquent until borrowers are at least 90 days late — a delay that helps explain the recent reporting lags.

The garnishment risk compounds the problem for subprime-focused lenders. As wages are withheld, household cash flow contracts, but the demand for credit does not. Borrowers with weaker credit often turn to costly or alternative lenders, a cycle that raises default risks across portfolios.

Lenders are being forced to rethink how they define risk, as consumers who once appeared creditworthy can slip from prime to subprime status in a matter of hours. Slok’s comparison underscores how rapidly risk profiles can shift.

As TransUnion’s Joshua Turnbull noted, student loan borrowers across all credit tiers remain vulnerable to delinquency and default — even as most consumers have managed their debt relatively well. About 1 in 5 of the newly delinquent borrowers held relatively strong credit ratings of prime or above.

The challenge for issuers is that traditional models may no longer capture these shifts, creating a need for more dynamic approaches to risk assessment.

The demand for loans persists, even as subprime borrowers — especially those with scores below 550 — are already constrained.

When defaults increase, traditional credit channels close, pushing borrowers toward payday lenders, fintech platforms, and other funding alternatives. Auto loans feel particular pressure because they make up a large portion of subprime portfolios.

This shift creates a split outcome: greater risk of defaults and portfolio stress on one hand, but also an opportunity to serve unmet demand through more flexible underwriting and use of alternative data.

The rise in student loan delinquencies may further compound the demand for subprime lending.

Some borrowers with stable incomes may now be pushed into subprime channels because their FICO scores dropped 50–150 points, temporarily penalizing them despite having steady earnings.

Lenders are expected to tighten standards by requiring more income verification, larger down payments, and smaller loan amounts. Borrowing costs will also rise, with higher APRs, steeper origination fees, and shorter repayment terms.

Rising delinquencies could drive up funding costs for subprime lenders that depend on securitization, squeezing the flow of credit.

Big banks, credit unions, and fintechs are all competing for this market, but they weigh the risks differently. Nontraditional lenders may capture more share, while established players tighten standards — creating a fragmented lending landscape.

Slok’s study and TransUnion’s data on garnishments confirm that the consequences are no longer theoretical: Millions of Americans are slipping further into subprime borrowing. Lenders face rising risk-adjusted demand, and competition will decide who is best positioned to withstand the pressure.