Federal student loan payments were paused for 3+ years from early 2020, due to the pandemic, when delinquency rate fell from c. 10% to < 1%. After resumption of payments in October 2023, a 1-year on-ramp was provided where borrowers who miss payments were not reported to credit agencies. Thus, their credit scores were not impacted, although interest accrual and payments continued. This expired and delinquencies started appearing on credit reports from Q1 2025. A few noteworthy points:
- Borrowers with a flat or growing balance increased from 48% in 2019 to 73% in 2022 and eased only to 63% in 2024 (partly due to litigation), but 35% of them in 2024 had a pre-pandemic delinquency.
- In Q1 2025, student loan balance increased by USD 16bn to USD 1.6tn. The delinquency rate picked up from <1% to c. 8%, with 10%+ of balances and 6mn borrowers either past due or in default. A study by the NY Fed indicates, among borrowers required to make payments, c. 24% were behind in Q1 2025.
- Average age of a delinquent borrower is up from 38.6 to 40.4. The share of delinquent loans, among ones already due for payment, is higher for borrowers aged 40+ (28.4% for 40-49 vs. 22.9% for 30-39).
- 50%+ of newly delinquent borrowers in Q1 2025 already had subprime credit scores. The rest (2.4mn), with a meaningful fall in credit scores, will face denial or higher borrowing rates on fresh credit.
Auto loan and credit card delinquencies in the US have been rising, driven by lower income quartiles. Non-asset owners have not benefited from wealth effect and are also facing higher cost of living. Student loan delinquencies have now risen, impacting credit scores, the ability and rate of borrowing. In a slowing growth backdrop, this could have a knock-on effect on consumer spending and other credit repayments.
Source: Bandhan MF Research.
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