Why are more people are falling behind on their car loans? The student-loan payment pause gives us a clue.

By Genna Contino

Student-loan forbearance offered many borrowers relief - but the resumption of payments is putting an additional strain on those with car loans

Since federal student-loan repayment resumed, student-loan borrowers who bought a car during the pause have been feeling the squeeze, experts say.

More borrowers fell significantly behind on their car payments last month - and experts say the resumption of student-loan payments could be a contributing factor.

Car loans delinquent by at least 60 days rose 2.2% month over month in September, according to a Cox Automotive report. This financial stress is particularly concentrated among subprime borrowers, who typically have credit scores below 620.

Subprime borrowers, who usually fall in lower income brackets, are not only more sensitive to inflation, but also more likely to have outstanding student loans. Since federal student-loan repayment resumed, student-loan borrowers who bought a car during the pause have been feeling the squeeze, experts say.

The payment pause provided financial relief to student-loan borrowers during the upheaval of the pandemic - but one unintended consequence is that many of these borrowers are now falling behind on their car payments.

From the archives (April 2024): Here's who really benefits from Biden's $153 billion in student-debt cancellation

How the end of student-loan forbearance led to increased auto delinquencies

In March 2020, the U.S. Education Department announced it would give federal student-loan borrowers the option to suspend their payments in response to the COVID-19 pandemic.

The payment pause, known as forbearance, artificially inflated borrowers' credit scores by reporting $0 payments as current. These borrowers were then mislabeled as prime, which gave them access to larger auto loans they otherwise might not have qualified for.

This prime status was paired with a temporary surge in cash flow from not paying their student loans. Borrowers had an extra $138 on hand per month on average, an amount that was no longer needed to help pay off loans, according to a National Bureau of Economic Research working paper. The report found that borrowers used that extra cash not to pay down other debt, but to increase their borrowing on auto loans, credit cards and mortgages.

Read more: Is now a good time to refinance your car loan? Here's how to tell.

The government paused student-loan payments, collections and interest for more than three years as part of its response to the pandemic. Even once payments resumed in October 2023, borrowers had a year-long grace period before missed payments were reported to credit bureaus. In May of this year, the Office of Federal Student Aid began resuming collection on defaulted loans.

"We've shown in our work that relieving the burden of student debt causes people to take out more auto loans, so it stands to reason that making the burden of student debt more onerous contracts auto lending," said Marshall Steinbaum, an economics professor at the University of Utah who has published research on student debt.

After missed student-loan payments began appearing on credit reports in early 2025, these borrowers' credit scores began to fall again. As a result, the number of auto-loan borrowers identified as subprime has grown.

"People who looked prime or near prime when the loan was originated over the last couple of years are actually now appearing to be subprime, and that's why the subprime delinquency rate is moving higher and continues to be elevated," said Jonathan Smoke, chief economist at Cox Automotive.

While more people were delinquent on their car loans last month, there hasn't yet been a notable spike in defaulted loans. Defaults inched up 1.3% in September, according to the Cox Automotive report, but are down 8.9% year over year.

Read more: Disabled student-loan borrowers are eligible for debt relief. They're not getting it.

These delinquencies don't always translate into defaults because borrowers often catch up on their own after missing a payment, said Clifford Rossi, a University of Maryland business professor and former chief risk officer for Citigroup's (C) consumer-lending division. Some lenders will work with borrowers to help them avoid default as well.

If defaults significantly increase in the future, experts say, it would be a stronger indicator that the U.S. economy is heading toward a recession.

A shifting payment hierarchy

Borrowers are traditionally more likely to prioritize auto loans and mortgages ahead of student loans when money is tight, a September TransUnion (TRU) survey found. But in the face of involuntary student-loan collections, those priorities can shift.

Between December 2024 and June 2025, the survey found that credit-card delinquencies among seriously delinquent federal student-loan borrowers jumped from about 1% to nearly 6% - a 479% increase. Auto-delinquencies among the same group grew from about 3.8% to 6.3%, a 67% increase.

Read more: Millions of student-loan borrowers have no idea how much they're supposed to pay

The data reflect how borrowers are first sacrificing their credit cards when faced with the increased pressure of resumed student-loan payments, but more are also falling behind on their car payments.

The financial strain from resumed payments is challenging the traditional payment hierarchy, Steinbaum noted. It's not that borrowers aren't trying to prioritize their car loans - it's that they simply can't.

"It's not clear that borrowers 'should' prioritize auto-loan payments, or that they're not already doing that and yet still going delinquent on auto loans," he said. "That's what happens when credit becomes tighter."

What personal-finance issues would you like to see covered in MarketWatch? We would like to hear from readers about their financial decisions and money-related questions. You can write to us at readerstories@marketwatch.com. A reporter may be in touch to learn more. MarketWatch will not attribute your answers to you by name without your permission.

-Genna Contino

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

10-21-25 1351ET