How Today’s Student Loan Mess Could Choke Tomorrow’s Loan Pipeline

Executive Summary

• The resumption of repayments on federal student loans, and the return of collection action, is impacting performance in other consumer credit portfolios as overstretched borrowers must cover more debt.
• This has implications for current bank and credit union loans, including those taken out while student loan payments were paused.
• Analysis by TransUnion also indicates that demand for new credit will be affected, potentially slowing loan growth.

The resumption of payments for federal student loans, as well as the return of government collection efforts on borrowers in default, is going to impact not only other types of loans that consumer lenders already have on the books, but also these borrowers’ appetite for new credit.

There is already evidence that consumers with delinquent federal student loans are having trouble paying off other personal debt — some of it incurred during the extended “payment pause” that began during the Covid crisis.

However, the challenges could multiply as millions of borrowers face potential garnishment of wages or offsetting of student debt against tax refunds or even Social Security benefits that they would otherwise receive. Under federal rules, defaulting on a government student loan accelerates the entire loan: Both the unpaid balance and any interest owed become immediately due, points out Michele Raneri, vice-president and head of U.S. research and consulting at TransUnion.

Banks and credit unions may also find that characteristics of some student loan borrowers may belie their credit scores, if those scores are weighed in isolation. Borrowers whose scores make them look like good risks may look much worse when they are suddenly shown to be seriously delinquent.

How so? Servicers of federal student loans report borrowers to credit bureaus as seriously delinquent when they go more than 90 days past due — until then, there’s no report at all of missed payments. Once the borrower goes 270 days past due, they go into default and collection can begin. (The halt on collections on defaulted loans lifted in May of this year.) Unlike many other forms of consumer debt, federal student loans generally cannot be discharged in bankruptcy court.

TransUnion recommends looking at whether student loan borrowers are making excess payments on their other consumer debt. If they aren’t, it could mean that they are already struggling with their overall debt load, and the resumption of student loan payments may be too much, Raneri says. Adding still more debt isn’t going to improve things for either the borrower or the lender.

TransUnion reports that 18.8 million federal student loan borrowers have been in their repayment phase for at least three months. A little over five million of those borrowers are classified as seriously delinquent. To put that group’s size in perspective, TransUnion points out that there are 200 million credit-active people in the U.S.

Trends and Attitudes Banks and Credit Unions Must Watch and Act On

TransUnion has conducted a nationwide study of borrowers’ conditions and attitudes. Among the findings:

• The portion of federal student loan borrowers reported as delinquent is almost double the historical high point of 15.4% in September 2012. In July 2025 29% of borrowers were reported as delinquent, with a small portion of that reflecting borrowers already in collection. That figure could grow, if additional borrowers who are presently less than 90 days past due become seriously delinquent instead of bringing their accounts current.

In addition, some borrowers are in statistical limbo, having not made payments for three months, but for various reasons had not yet been reported as delinquent. Raneri refers to these as “shadow delinquencies.”

• July marked the fifth consecutive month when more than five million federal student loan borrowers were 90+ days past due. That means about one in three borrowers in repayment mode are delinquent.