Subprime Demand Rises Amid Student Loan Repayment Strain

Subprime originations are rising following increased financial challenges for households, according to the TransUnion Consumer Credit Industry Insights Q2 2025 report. The trend of growing demand and its corresponding greater risk is not a rare pattern.

Student loan repayments have resumed, and millions of borrowers now have declining credit scores as a result. Falling scores are pushing many into subprime territory, increasing nonprime credit product usage.

The approval process for credit issuers has become stricter because of rising delinquency rates, which creates challenges for both borrowers and creditors.

“As we saw in the post-pandemic credit demand surge, a commensurate potential increase in charge-offs is typically expected, and pressure-tests lenders’ ability to have effective underwriting tools to separate truly creditworthy borrowers from high-risk applicants,” Colin Tran, VP of Corporate Affairs at Trust Science, told us.

The credit challenges fueled by student loans mirror those of past downturns, but this time they spotlight the growing role of AI models and cashflow analytics.

Increased Risk Among Low-Income Borrowers

OppFi CEO Todd Schwartz told us that two-thirds of consumers live paycheck-to-paycheck while their emergency financial readiness has reached its lowest point since 2015.

Americans who have credit scores below 650 or no credit score at all face increased risk because of the recent student loan payment resumption.

The Federal Reserve’s Survey of Household Economics and Decisionmaking (SHED) identifies the most at-risk groups as low-income households, young adults, and families without emergency savings.

For these populations, loan repayment resuming can trigger defaults, accelerating their movement into subprime categories and driving higher demand for personal loans, credit cards, and auto financing. The applicant pool is both larger and riskier for financial institutions.

The Underwriting Challenge

The main challenge is building underwriting models that limit losses, since traditional scoring systems falter when millions experience sudden score swings.

“The best lines of defense for lenders are to incorporate real-time data into their underwriting, and to have strong model governance to frequently update their scoring, pricing, and other related lending models,” Tran told us.

OppFi and its bank partners are adjusting by focusing on long-term customer value rather than short-term repayment ability.

“The best lines of defense for lenders are to incorporate real-time data into their underwriting.” — Colin Tran, VP of Corporate Affairs at Trust Science

Schwartz explained that “revamped underwriting models use AI and extensive data to better assess credit risk, including analyzing bank account cash flows to gain a more holistic view of financial behavior.”

“This shift helps smooth out volatility, supports more consistent approval rates, and enables flexible repayment options that are easy for consumers to understand and manage,” he continued.

Alternative Data and Cashflow Scoring

These strategies now rely on nonstandard data as their core foundation. The cashflow scoring method reveals financial stability, spending behavior, and income patterns, which traditional credit reports fail to detect.

Tran said alternative data underwriting delivers a complete understanding of consumer creditworthiness, which helps lenders evaluate risk better for subprime and thin-file market segments.

Alternative data shows that many borrowers labeled high-risk by traditional methods actually perform well, allowing lenders to identify these “Invisible Prime” customers.

Schwartz said the key to managing higher demand levels while minimizing charge-off risks depends on data-based underwriting strategies. OppFi enables underwriting models to process more than 500 attributes and billions of data points through AI technology, which results in better credit assessment accuracy.

The platform enables originations to expand responsibly through long-term customer value analysis and bank-level cash flow data, which maintains controlled charge-off rates.

Long-Term Implications

The DOE projects that nearly a quarter of federal student loans could default within months — a sign of how severe the situation may become. Past downturns, from the Great Recession to the pandemic, showed how inflation and repayment shocks can quickly drive delinquencies higher.

Lenders face those same risks today but have stronger defenses, including adaptive models and broader hardship programs. For personal loan providers, rising student debt and other macro pressures make alternative data more essential than ever.

Regulatory Outlook

The regulatory landscape adds another layer of uncertainty. Under the current administration, the Consumer Financial Protection Bureau has scaled down enforcement, with leadership changes and staff cuts limiting its reach.

Issues such as student loan and medical debt oversight have been deprioritized, leaving states and other regulators to step in where possible.