There’s big news! Federal student loan collections have been reinstated after a five-year pause. At the same time, a record number of borrowers are falling behind on their student loan payments, leading to stark drops in their credit scores.
As student loan delinquencies mount, mortgage lenders must take proactive measures to protect their businesses from unexpected loan fallout and repurchase requests. After all, borrowers with student loan delinquencies may appear creditworthy during their initial applications, only to incur serious credit score damage down the line.
So, what’s spurring this surge in student loan delinquencies? Below, we’ll break down the recent student loan policy changes and how they’re affecting borrowers’ credit. After that, we’ll highlight a powerful solution to help you support your applicants and reduce your fallout and repurchase risk.
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The State of Student Loans From 2020 to 2025
In March 2020, federal student loan payments were paused to provide borrowers with some much-needed COVID-19 emergency relief. During this prolonged forbearance period, which lasted over three years, borrowers got a break from making payments and accruing interest.
In October 2023, this emergency relief was lifted. Many borrowers struggled to make payments again, leading to an uptick in delinquencies. However, these borrowers remained insulated from collections, due to the Biden-Harris Administration’s ongoing pause.
As of May 5, 2025, the Trump Administration officially resumed collections on defaulted student loans. Its goal was to prevent taxpayers from shouldering the burden of unpaid loans, as explained by U.S. Secretary of Education, Linda McMahon:
“American taxpayers will no longer be forced to serve as collateral for irresponsible student loan policies… The executive branch does not have the constitutional authority to wipe debt away, nor do the loan balances simply disappear…. Going forward, the Department of Education, in conjunction with the Department of Treasury, will shepherd the student loan program responsibly and according to the law, which means helping borrowers return to repayment.”
Student Loan Delinquencies and Collections: By the Numbers
While resuming student loan collections is meant to stabilize the country’s long-term economic outlook, the short-term impacts on borrowers are severe. Once in collections, borrowers may be subject to wage garnishments, withheld tax refunds, reduced Social Security checks, and fees.
A student loan is typically considered in default once a borrower misses 270 days of payment, though delinquencies can start showing on credit reports in as little as 30 days. Here are some statistics about borrowers in this predicament:
- As of 2025, 42.7 million student loan borrowers had outstanding balances totaling $1.6 trillion.
- An estimated 5.4 million borrowers haven’t made a payment since the COVID-19 payment pause was lifted.
- Only 38% of borrowers are current on their student loan payments—the rest are late or in an interest-free forbearance or deferment.
- Nearly 25% of the federal student loan portfolio is predicted to be in default in the next few months.
- Student loan servicers have a backlog of 1.8 million applications for affordable repayment plans.
- Nearly 2 million borrowers are unable to make payments due to processing bottlenecks.
While these numbers are striking, they may only be scratching the surface. The true scope of the student loan crisis is likely more severe. According to TransUnion, approximately four million student loans that are over 90 days delinquent haven’t been reported to the credit bureaus yet, temporarily shielding these borrowers’ credit scores from their missed payments.
Additionally, over eight million borrowers are still enrolled in the Biden Administration’s Saving on a Valuable Education (SAVE) repayment plan. Since this program has been temporarily blocked by federal courts, participants are in legal limbo. Without clear guidance, they may accidentally incur delinquencies and credit damage in the coming months.
Student Loan Collections’ Credit Implications
It’s easy to assume that student loan hardships are primarily affecting those with lower credit scores. However, people across the credit spectrum are feeling the impacts. In fact, nearly 25% of borrowers with payments 90 days overdue have “prime” credit scores.
Borrowers with higher credit scores often experience more significant declines from student loan delinquencies. Just take a look at the average point drop for borrowers with these starting scores:
- Subprime (580-619) – 42 points
- Near-prime (620-659) – 64 points
- Prime scores (660-719) – 99 points
- Prime-plus (720 to 779) – 121 points
- Ssuperprime (780 to 850) – 175 points
As you can see, student loan delinquencies have the potential to decimate otherwise creditworthy applicants’ scores. This credit damage may have far-reaching implications for the lending industry. Not only will lenders receive fewer applications, but borrowers who apply may only qualify for loans with higher interest rates and monthly payments.
5 Factors Influencing Student Loan Delinquencies
So, why are so many borrowers—including those with otherwise strong credit histories—letting their payments fall behind? Here are a few factors contributing to the current student loan delinquency rate:
- Inflation – Inflation has hiked up the prices of everyday items in recent years. Today’s prices are 23.3% higher than they were in February 2020 before the COVID-19 pandemic. As a result, today’s consumers have less income left over to allocate toward student loan payments.
- Tariffs – After raising interest rates for 18 months, the Federal Reserve successfully brought the inflation rate closer to its 2% target. However, President Trump’s recent tariff policy may reverse this progress. Many economists anticipate a resurgence of inflation throughout 2025. The resulting price hikes may erode borrowers’ disposable income further and worsen delinquency rates.
Read More: 2025 Mortgage Market Trends and Predictions - Stagnant wages – As the cost of living climbs, wages are failing to keep pace. According to a 2024 survey, nearly half of American workers don’t believe they can support a family on their current salary, 40% claim they can’t save for retirement, and 37% can’t afford to buy a home. With budgets stretched so thin, many workers are also struggling to keep up with their student loan payments.
- High interest rates – Cash-strapped consumers have increasingly relied on credit cards and loans to fill the gaps in their monthly budgets. Borrowers with student loans may be juggling costly credit card payments, forcing them to prioritize high-interest debt over their student loan obligations.
Read More: The Horrifying Truths About The Impacts of Consumer Debt on Credit - Confusion – After a prolonged forbearance period and additional policy changes, many borrowers are confused about when their payments are due, which repayment plan they’re enrolled in, and how much they owe. Additionally, around eight million borrowers are in “forced forbearance” while the legality of their loans’ SAVE repayment plan is litigated in court. Some of these borrowers may miss payments, only to realize the consequences once it’s too late.
What Rising Student Loan Delinquencies Mean for Mortgage Lenders
With these factors at play, it’s no wonder that so many Americans are struggling to make their student loan payments on time. However, this rise in delinquencies doesn’t just affect borrowers—it also poses a threat to mortgage lenders.
Due to processing backlogs and delayed reporting, some applicants may appear creditworthy when they initially apply for their home loans. These applicants may not even realize that a student loan delinquency is about to hit their credit reports.
After investing time and resources into originating a loan, discovering a delinquency late in the process can be costly and disruptive. It can also lead to the following issues:
- Loan fallout, derailing the deal after weeks of hard work
- Repurchase requests from secondary market investors
- Reputational damage in the secondary loan market
Read More: The Secondary Mortgage Market: How Can You Ensure Your Loans Meet Investor Requirements?
How to Protect Your Mortgage Lending Business With Cascade UDM
As student loan delinquency rates climb, you need to employ effective strategies to reduce your loan fallout and repurchase risk. Cascade Undisclosed Debt Monitoring (UDM) can assist with this process.
This continuous credit monitoring tool keeps close tabs on your applicants’ delinquency status during the quiet period, which takes place from your initial credit pull through closing. It can alert you in real time about:
- New tradelines
- New inquiries
- Late payments
- Debt-to-income increases
- Collection items
As soon as Cascade UDM detects problematic credit activity, you’ll receive an alert via email, text, or LOS notification. After that, you can address the issue with your applicant before it derails their closing process. As a bonus, Cascade UDM eliminates the need to pull a Refresh Report for your LQI compliance.
Stay One Step Ahead of Student Loan Delinquencies With Certified Credit
With student loan requirements and credit conditions constantly evolving, you need real-time insights into your applicants’ creditworthiness. Cascade UDM can provide you with the visibility you need to act fast in the face of undisclosed debt.
Cascade UDM is just one of the many solutions we provide at Certified Credit. As a leading mortgage solutions provider, our full suite of products and services includes:
- Affordable credit reports
- Credit score improvement tools
- Automated credit supplements
- Automated lead generation
- Automated prequalification
- Undisclosed verification of income and employment
- Flood zone determinations
- Fraud and risk support
- Property and valuation tools
- Settlement services
Ready to shield your business from the risks of rising student loan delinquencies? Schedule a credit consultation with our team today!
Sources:
StudentAid.gov. COVID-19 Emergency Relief and Federal Student Aid.
https://studentaid.gov/announcements-events/covid-19
U.S. Department of Education. U.S. Department of Education to Begin Federal Student Loan Collections, Other Actions to Help Borrowers Get Back into Repayment.
Economic Policy Institute. Department of Education resumes student loan collections on defaulted loans.
Market Watch. The student-loan trend that’s ‘alarming’ lenders: Even borrowers with great credit scores are falling behind.
Yahoo!Finance. Millions of student loan borrowers head to collections as delinquency rates soar over 20%.
https://finance.yahoo.com/news/millions-student-loan-borrowers-head-164900581.html
TransUnion. As Federal Collections Activity Resumes, More Than One in Five Federal Student Loan Borrowers With a Payment Due are Seriously Delinquent.
https://newsroom.transunion.com/may-2025-student-loan-update/
Bankrate. Inflation fell last month, but prices remain high — here’s what’s rising most.
https://www.bankrate.com/banking/federal-reserve/latest-inflation-statistics/
HR Dive. Current wages aren’t keeping up with cost of living, workers say.
https://www.hrdive.com/news/current-wages-arent-keeping-up-with-cost-of-living-workers-say/705326/
NASFAA. ED: Borrowers Enrolled in SAVE Repayment Plan Expected to Remain in Forbearance for ‘Six Months or Longer.’
