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Geoff Black spoke to a former client last week who was looking to purchase a newly built home. She was a “responsible” borrower but made a mistake: she had lost track of her student loan payments and was 60 days late.
The client, who logged into her student loan portal and made a payment, is now in limbo about whether a new credit report needs to be pulled in her 90-day escrow, the loan officer at Guild Mortgage told HousingWire.
This is the reality for many prospective borrowers as the federal government resumed collections on defaulted student loans Monday, ending a five-year pause that began during the COVID-19 pandemic.
Over 42 million Americans hold student loans totaling more than $1.6 trillion, and over 5 million are in default, per federal data — a number expected to double in months.
Borrowers who haven’t been making payments face a rude awakening as their budgets are expected to become more constricted.
Kevin King, LexisNexis Risk Solutions’ vice president of credit risk and marketing strategy, says that the resume in loan collections creates a tale of two types of borrowers:
- Consumers with existing mortgages who also have student loan debt;
- Consumers who are looking to buy with a mortgage and have delinquent student loans
“I don’t think we’re going to see a lot of situations where a big chunk of consumers find out that the rates are going to get adjusted upwards because all of a sudden they have a late stage delinquency on their credit file,” King said. “But, we will see student loan payments shift on consumers’ hierarchy of payments, meaning that they might start to prioritize those payments over, say, an auto loan payment or a mortgage payment.”
King says he worries that borrowers could spiral into debt, which could result in bankruptcy.
Brendan McKay, mortgage broker and owner of McKay Mortgage, pointed out that borrowers don’t have a choice in shifting their hierarchy of payments due to wage garnishing.
“The fact that they are going to start garnishing their wages for these payments is a disaster situation, not only for people trying to qualify, but people who are currently in mortgages. They don’t have the option to simply default on their student loan debt to make their mortgage payment if they’re in that situation,” he said.
McKay says above all, the student debt crisis is a systemic issue. “I think it’s especially heartbreaking when there is a student loan crisis in this country, and the entire system needs a massive overhaul. You’re letting 17-year-olds make decisions to borrow hundreds of thousands of dollars in debt,” he said. “Now, they’re not just waking up and having one payment due, they’re waking up to having three payments due. Given this current state of affairs in America, and how many people are living paycheck to paycheck, trying to squeeze out a payment out of nowhere, by surprise, is a heavy burden.”
Leon Turkin, mortgage broker at Turkin Mortgage, says that borrowers might have become accustomed to reallocating payment money to other bills during loan forbearance periods.
“Now that those payments are back, the average borrower with $37,000 in student loan debt and a standard repayment plan is facing an additional monthly burden of around $400,” said Turkin.
Jennifer McGuinness, CEO of Pivot Financial, says that it’s on the lender to be diligent on the status of their borrowers’ student loans. “This will also be an impact on loss mitigation for loans that are mortgages that are seeking a repayment plan, a mortgage forbearance plan, a modification, etc, since these debts now need to be paid, they need to be considered in those analyses as well,” she said. “If you have the real status of these loans at the time you’re originating a new loan, your DTI may not be correct.”
McGuinness continued, “The GSEs give certain leeway right about how to calculate student loan payments. So, for example, if a borrower is in an income-driven repayment plan, the lender can go get documentation, and if it says the borrower’s payment is $0, they can qualify the borrower using $0, but there is no longer any guarantee, nor was there previously, and throughout that 20 or 25 year period, that the debt will actually be forgiven.”
Concerns about DTI ratios
Turkin said he is starting to see the early signs of pressure in the form of rising forbearance requests and tighter cash flow among borrowers.
“I’ve had clients come in looking to restructure their debt — some are refinancing personal loans or extending their car loan terms just to make room in their monthly budget for the reinstated student loan payments. We’ve also seen a slowdown in pre-approvals for new mortgages as lenders are recalculating DTI ratios with student loans back on the books.”
As a result, he’s advising many of his clients to recertify for income-driven plans and even delay home purchases until their DTI can support a healthy mortgage payment. “From a bigger picture perspective, I expect we’ll see more homeowners slide into 30 or 60 day delinquencies in the second half of 2025, especially in high-cost-of-living areas where housing and student debt intersect most,” he added.
Nicole Rueth, founder of The Rueth Team at Movement Mortgage, says she’s concerned about cash flow amid an already tight economic environment. “For buyers already walking a tightrope, restarting payments can feel like a punch to the budget, especially with inflation still eating into essentials,” Rueth said. “It’s not that they suddenly won’t qualify, it’s that they will feel less confident, and that hesitation can delay decisions or stretch household stress.”
Carlos Scarpero, a mortgage broker at Edge Home Finance, says he’s noticed two key rule changes that are leading him to have to decline multiple borrowers with student loan issues.
“The first problem is that income-based repayment is needed to qualify but borrowers have not been able to access the system to request it,” Scarpero said. “Problem two is that under the Biden administration, they said they would not report late student loan payments. That policy got reversed under Trump. Many people suddenly started having late payments show up on their credit reports.”
Scarpero continued, “Due to the late payment showing up on the credit report, it’s now failing AUS in many cases. But then, if we take it as a manual underwrite, there is a rule on FHA that it can’t have any late payments reported over the last 12 months. Most VA lenders also adopt the same rule, even though it’s not an official VA guideline. This means that because of the new student loan rules, many borrowers are now having to wait a year after the student loan has been brought current.”
A change in tone
Many borrowers don’t have a single loan, since many take out individual loans per semester or year, which makes it easier for them to miss multiple payments.
“These borrowers with multiple loans, they get a bazillion statements. It’s possible someone could miss one month’s worth of student loan payments and miss five in one shot. Each one of those missed payments is, I would speculate, 40 to 60 points,” said Black. “And so I do believe that we’re going to have a meaningful amount of borrowers that sort of forgot [about their loans], didn’t want to deal with it or didn’t want to accept that they’re due.”
King is concerned that borrowers who missed payments will have unrealistic expectations about their mortgage qualifications.
“Now my gut feeling is that for most consumers, that that issue, in and of itself, is not going to prevent them from getting a mortgage, but if it’s with a different credit score, that becomes a problem, because the worse your credit score, the more lenders are going to be worried about your debt-to-income ratio,” King said. “The appetite for new mortgages is going to go down for a decent chunk of consumers. Take things like interest rates off the table and just acknowledge people’s general credit stress will spike.”
“There’s been a change in tone,” Black added. “Now, borrowers are acknowledging that they have to start making payments again when just a few years ago, people were trying to get loans forgiven and the loans were less of a concern.”
Black continued, “It’s probably too early to have any sort of firsthand experience where I go to pull someone’s credit, they didn’t realize they missed a payment, and when I pull it, I’m the one to tell them. That will start happening in the next 60 days, and you might see that reaction spill into the mortgage application rate or average FICO scores, or even defaults on car loans.”
That being said, Black says that it’s all relative. “You’re definitely gonna see student loan defaults or missed payments skyrocket because they’re at zero right now,” he explained. “We need to look at the past data and ask how high is normal. It’s gotta affect consumer spending and behaviors, regardless.”
English (US) ·