Late Pays Rising For Student, Auto Loans

Delinquencies are building across two major food groups — student loans and automobile financing — the feed credit scores and are sure to impact the ability of would-be home buyers to obtain a mortgage.

The Education Department hasn’t updated its official student loan repayment statistics since September. But according to Nelnet, the largest federal student loan servicer handling roughly13 million accounts, repayment rates have not risen above 40 percent since the Biden Administration’s repayment pause ended.

In February, Nelnet’s repayment rate had dipped to just 38 percent. The company’s figures were provided to Preston Cooper, a senior fellow at the American Enterprise Institute who reported on them in a recent post.

Meanwhile, auto loan delinquencies increased across all days-past-due categories in February, both year-over-year and in comparison to pre-pandemic levels, according to VantageScore. At the same time, overall auto loan balances increased by $413, almost a two point jump.
In the student loan category, one out of five Nelnet’s borrowers are late, and those delinquencies are now being reported to credit bureaus. If they continue falling behind, they will become subject to debt collection. “Without intervention, we anticipate the largest wave of defaults in the student loan program’s history — upwards of 3.5 million borrowers,” the company says.

When forbearance ends for millions of others, writes Cooper, they, too, will become at risk of delinquency and default.

In the past, delinquencies mostly occurred among those who already had “rocky” credit.

Most pre-pandemic student loan defaulters had credit scores below 600. And they were roughly three times as likely as non-defaulters to be in collections on another debt, according to the Urban Institute.

Now, more and more of those with strong credit records have gone delinquent. They could probably make their payments easily but many of them simply are unaware their payments are due again, says Cooper. But as a result, Credit Karma shows that delinquent borrowers with the best credit records saw an average 137-point drop in their credit scores.

At VantageScore, overall late-stage late payments grew by 25 basis points in February, due in part by both auto loan delinquencies and the impact of renewed student loan reporting has on credit files. Because of those factors, the VantageScore dropped one point to 701 after remaining at 702 for the previous 11 months.

“Borrowers are making tough choices to prioritize their debt obligations, and auto loans are decreasing in priority,” said the credit scoring company’s Susan Fahy. “It’s unusual to see a decline of this size, and we attribute the change to the increased demands of car loan balances and student debt repayment.”

Both early and late-stage credit delinquencies (30 to 59 days late and 90 to 119 days, respectively) rose overall in February compared to the prior month, and all stages remained elevated over the prior year.

Late-stage lates rose sharply month-over-month, from 0.20% to 0.45%, as missed student loan payments began to appear on consumer credit files, VantageScore reported. “Consumers now face the added demand of catching up to missed student loan payments,” the company said.