End of Student Loan Relief Reshapes Auto Lending

Most Americans depend on personally owned vehicles for transportation, and the widespread availability of automotive financing has long played a crucial role in making vehicle ownership possible. This access to credit empowers consumers to purchase the vehicles they need, whether new or used, in good times and bad.

As new-vehicle prices have increased over time, the new-vehicle market has tended to be underrepresented by subprime borrowers, while the used-vehicle market has been overrepresented. In 2019, 15% of new loans and 22% of used loans financed through Dealertrack were to subprime borrowers. Collectively, about 19% of all auto loans were extended to subprime borrowers, a proportion closely aligned to the subprime share within the U.S. population.

The subprime share of loans at origination is a key component of our Dealertrack Credit Availability Indices and a good indicator of lender conservatism or aggressiveness. Following the supply chain disruptions in 2021 associated with the global pandemic, subprime participation has declined, suggesting tighter credit conditions. Additionally, a rise in interest rates affected lower credit tiers to a greater extent, leading to affordability challenges. Combined with higher prices for new and used vehicles, the monthly payment plan required for an auto loan simply did not align with the income of many subprime borrowers, despite relatively strong wage gains.

One key implication of declining subprime activity in auto loan originations is a smaller retail market. Indeed, at its lowest point in 2023, only 6% of new loans and 16% of used loans were extended to subprime borrowers.

While the market potential is limited when subprime loan activity is depressed, the silver lining is likely to be better-than-normal loan performance. Subprime loans are far more likely to fall into delinquency and default; therefore, all other factors being equal, when the loan pool has fewer subprime loans, it should have lower-than-normal severe delinquencies and defaults. However, that has not been the case.

Severe delinquencies have been historically high over the last three years, and defaults have been higher than normal for the previous two years as well. This change was an important clue that something had shifted, causing the credit score at origination to be less predictive of future loan performance.

The story surrounding subprime lending over the last five years is more complex than tighter credit and declining affordability, as the subprime pool itself has changed substantially due to shifts in student loan payments and the reporting of student loan status to the credit bureaus.

To better understand the dynamics driving this change, we asked Shams Blanc, vice president and head of scores for the auto industry at FICO, to dig into the data. She provided a very clear narrative of what’s going on in the market.

Looking at FICO Scores, how are scores shifting now that student-loan delinquency reporting has resumed?

Shams Blanc: “When federal forbearance officially ended in October 2024 and delinquency reporting resumed, the scoreboard caught up with reality. Approximately two million auto-loan borrowers had a student-loan delinquency added to their credit file in Q1 2025. One in five of these consumers saw their score drop by 100 points or more overnight. Among 18-29-year-olds, nearly 30% experienced that same 100-point decline.

Scores didn’t make these consumers riskier – they revealed risk that had been hidden for several years. The result: a sharp rise in the subprime mix of the current loan portfolio. The share of auto borrowers with scores below 620 climbed nearly a full percentage point in one quarter, reversing much of the credit ‘lift’ observed during the payment pause – a period that temporarily boosted average scores by sidelining many riskier borrowers.”

How has the resumption of student-loan repayments impacted the auto market?

Shams Blanc: “Student-loan delinquencies have distorted one input for credit scores without meaningfully changing another: repayment behavior. Here’s what we’re seeing:

• Mix shift, not meltdown. Many newly scored subprime consumers are still current on their auto loans. Their scores dropped due to student loan activity, not because of missed car payments.
• Payment hierarchy holds. Consumers are 4x more likely to fall behind on student loans than auto loans. Cars remain essential and auto payments continue to come first.
• Delinquency optics are misleading. Subprime auto delinquency rates for student loan borrowers have dropped about five points, but only because the number of subprime borrowers increased. It’s a data mirage, not a sign of improvement.
• Lender decisions are getting tougher. Relying on strict score cut-offs now pulls more mixed-risk borrowers into the subprime category, making it harder to know whom to approve and how to price.”

Why should lenders be looking carefully at subprime borrowers right now?

Shams Blanc: “Because today’s subprime isn’t what it used to be. Almost 3% of today’s total subprime auto consumers got there solely due to student loan delinquency reporting and are still on time with repaying their auto loans. This change pushed roughly 10% of auto borrowers with student loans into the subprime category – lenders should broaden their view of these borrowers’ ability and willingness to repay.

The smart move is to segment beneath the score:

• Isolate student-loan-driven drops. A borrower with a 610 credit score (a range typically considered subprime) who just missed a student loan payment is not the same risk as a 610 who defaulted on an auto loan.
• Evaluate risk appetite frameworks. Use variables that signal auto repayment behavior for policy review triggers – not blunt thresholds.
• Monitor leading performance indicators. Segment subprime portfolios more granularly to surface early warning signs that are not being masked by shifting new consumers in this space.

For lenders, the opportunity – and the risk – lies in understanding why a score dropped, and knowing how to manage this larger, more complex subprime pool.”

As FICO’s research suggests, the treatment of student loans over the last four years complicates expectations for loan performance. We typically review the credit score at origination when assessing loan performance data each month, as this aligns with the origination data we receive from Dealertrack. Credit scores are dynamic and constantly evolving; however, movements in credit tiers typically follow a bell curve, with a balance between improvement and degradation.

As Shams points out, the treatment of student loans means that credit has improved abnormally over the last few years and is now declining abnormally. Examining data from Equifax on outstanding auto loans, over 20 million loans now have a lower credit tier than when they were originated. That is an abnormally high level of degradation.

This change is a big issue for auto credit availability, as it suggests that the shaky loan performance we have been observing is likely to continue even if the economy is stable. And shaky loan performance will lead lenders to remain risk-averse and keep yield spreads wide to price in higher risk. Ultimately, higher yield spreads mean auto loan rates remain high and affordability remains challenged even if the Fed starts cutting rates.

For consumers with student loans and dropping credit tiers, it means affordability is declining. A tier decline in credit score can result in a higher interest rate on auto loans by almost 300 basis points for a 1-tier drop and more than 600 basis points for a 2-tier drop. That is a significant shift.

This revelation also casts a brighter light on the strong retail vehicle sales we had in 2020 and 2021. The year 2021 was the strongest in history for used retail transactions, driven in part by the reverse of what we are seeing now, with credit tiers improving, not declining. That means that, in addition to the Fed cutting rates to zero, subprime consumers with student loans saw their auto loan rate offers fall by an additional 3 to 6 percentage points, greatly improving monthly payment options and, therefore, their affordability.

We do not expect credit availability to improve in the near term, which will likely mean that rates will remain high and about where they have been, at least for the next six months. Tight credit and high rates will keep demand limited.

If there is a silver lining to this story, it is that auto loans should continue to rank highly in the payment hierarchy, especially for consumers with student loans. Those borrowers who received prime rates in recent years cannot achieve similar payments in today’s market, especially if their credit tier has fallen. As long as such borrowers are employed, they should want to avoid defaulting on an auto loan, even if financial pressures cause them to fall behind on a student loan payment or two.

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FICO is a leading analytics software company, helping businesses in 80+ countries make better decisions that drive higher levels of growth. The FICO® Score is used by lenders to help make accurate, reliable, and fast credit risk decisions across the customer lifecycle. The credit score rank-orders consumers by how likely they are to pay their credit obligations as agreed. The most widely-used broad-based credit score, the FICO Score plays a critical role in billions of decisions each year across the credit ecosystem. For more information, visit: https://www.fico.com/en/products/fico-score