Pandemic Era Pause on Student Loan Repayments is Now Over

Consumer Credit at a Turning Point

U.S. lenders, particularly credit unions and community banks, are facing a significant shift in the consumer credit landscape. Late-stage delinquencies are rising rapidly, largely driven by increased inflation, the recent reinstatement of student loan payments after years of hiatus, and stagnant wage growth. This trend has brought the average U.S. credit score down to 701, its first notable dip in nearly a year, due to heightened financial pressures, especially impacting auto loans and credit cards. Students coming out of school today are at a significant disadvantage, and there is little sign of any easing up for them.

Rising Late-Stage Delinquencies: Key Trends

Recent data from VantageScore’s February 2025 CreditGauge report indicates that late-stage delinquency rates (90+ days overdue) more than doubled from 0.20% to 0.45%. Such sharp increases are at their highest level in five years, reflecting a broader trend of financial distress among consumers. Two primary factors driving this uptick:

• Resumption of student loan payments after a prolonged pause.

• Increasing auto loan delinquencies, influenced by higher interest rates and inflated vehicle prices.

For credit unions, traditionally proud of strong borrower relationships and low default rates, this signals a critical moment requiring proactive risk management.

Student Loan Payments Return: A Major Stress Factor

The reinstatement of federal student loan payments in late 2023 has been particularly impactful:

• Approximately 22 million borrowers had student loans reinstated.

• 43% of these borrowers—about 9.2 million people—were delinquent as of February 2025.

This massive scale of student loan delinquency is unprecedented, potentially lowering affected consumers' credit scores by up to 129 points. While borrowers maintaining payments see slight score improvements, the broader trend remains negative, with an expected national credit score drop to 700 by mid-2025. Now with the federal government beginning collections on student loan debts, consumers are beginning to panic more and more about the future tradeoffs they must make.

Spillover Effects: Auto Loans and Credit Cards Impacted

The financial strain from renewed student loan obligations is creating noticeable spillover effects:

• Auto Loans: Delinquencies increased significantly across all categories (30+, 60+, 90+ days). Borrowers are prioritizing student loan and credit card payments over car loans.

• Credit Cards: Delinquencies are climbing steadily, reaching the highest loss levels since 2010. Credit card originations are declining as borrowers reduce new credit usage.

These interconnected stresses underscore the need for lenders to closely monitor and reassess portfolio resilience. On top of that, lenders are reporting a rise in consumers simply abandoning car loans. If the car has a mechanical issue that can't be fixed, consumers will simply let their lenders repo a broken car. This is a problem we have been seeing time and time again from our customers.

Underwriting in a Softening Credit Environment

With borrower risk profiles changing rapidly, financial institutions must recalibrate underwriting practices:

• Include student loan obligations explicitly in debt-to-income (DTI) calculations.

• Update risk models to reflect current conditions, tightening income and employment verification standards and adjusting risk thresholds.

• Proactively offer loan modification programs to manage emerging borrower distress, reducing the likelihood of defaults.

Real-Time Income & Employment Verification: Essential for Lenders

As traditional credit metrics become less predictive, real-time income and employment verification emerges as critical:

• Accurate assessment of borrower capacity, reducing reliance on outdated information.

• Enhanced fraud prevention, addressing the significant risks of income misrepresentation and document forgery.

• Modernization of legacy practices, streamlining approvals and improving accuracy and efficiency in underwriting.

Adopting digital verification tools not only reduces risk but also helps maintain responsible and inclusive lending practices.

Practical Steps for Credit Unions and Community Lenders

To navigate this evolving landscape, lenders should consider the following actionable steps:

1. Segment Portfolio Risk: Identify and closely monitor borrowers heavily impacted by student loan repayments.

2. Proactive Borrower Outreach: Communicate early with at-risk members, offering refinancing options and hardship programs.

3. Implement Real-Time Verification: Incorporate modern verification technology into loan application processes to ensure reliable borrower data.

4. Review Underwriting Policies: Adjust score thresholds and integrate explicit student loan payment data into underwriting.

5. Strengthen Portfolio Monitoring: Enhance early-warning systems and reserve calculations to prepare for increased defaults.

6. Promote Financial Counseling: Provide resources and counseling to help members better manage new financial realities.

7. Modernize Lending Technology: Adopt digital platforms to improve borrower experiences and operational efficiency.

Preparing for Future Credit Trends

The resurgence of student loan payments and the rise in late-stage delinquencies present clear challenges. However, with strategic foresight, proactive management, and technology-driven solutions, credit unions and community lenders can effectively navigate these complexities. By emphasizing responsible lending practices and employing real-time data insights, lenders can continue to support their communities even amid economic uncertainty.

Through prudent, proactive steps, lenders can successfully manage risk, uphold strong member relationships, and position themselves for resilience and growth in a changing credit environment. To learn more about how enhancing income verifications can help, let’s chat. Email me at [email protected] to discuss further.