Available at: https://ssrn.com/abstract=6361458
Abstract:
The following Deep Dive presents an analysis indicating that one student loan in delinquency can make borrowers of every credit tier subprime, according to recent data from the Federal Reserve Bank of New York. Once a borrower becomes subprime, their interest rates for lines of credit could more than double, making it substantially more difficult—if not impossible—to buy a house or a car, open a credit card, get a personal loan, or access other loans to make ends meet. Borrowers could then be targeted with predatory loan products, some with interest rates as high as 662 percent, that can trap them in further lifelong debt.
Summary:
The Student Borrower Protection Center’s “Deep Dive: The Hidden Costs of Delinquency” provides a grim but unsurprising picture of what happens when federal student loan borrowers fall behind. Drawing heavily on recent Federal Reserve Bank of New York data, the article explains that a single delinquent student loan can crater a borrower’s credit score by 87 to 171 points, often instantly transforming even “superprime” borrowers into subprime consumers.
The paper details how borrowers with previously solid credit scores can suddenly find themselves unable to qualify for conventional mortgages, facing doubled automobile interest rates, or paying absurdly high rates for personal loans. One chart estimates that a borrower with an average credit score of 684 could see that score collapse to approximately 519 after a delinquency, with auto loan rates jumping from 6.7% to 13.22% and personal loan costs skyrocketing.
The article further explains that this damage radiates beyond borrowing. Delinquent borrowers may face difficulty renting apartments, obtaining utilities, securing insurance, getting cell phone plans, or even obtaining employment where credit checks are permitted. As the paper correctly recognizes, once borrowers are locked out of conventional credit markets, many become targets for payday loans, title lending, contracts-for-deed, and other predatory financial products carrying triple-digit interest rates.
The article also notes that over 5.6 million borrowers were already reported delinquent in the first quarter of 2025, with projections that 9.2 million borrowers could become delinquent by the end of June 2025. The paper attributes much of this crisis to the collapse of affordable repayment options, the suspension of SAVE Plan implementation, massive servicing backlogs, and administrative failures within the Department of Education.
Finally, the article warns that the resumption of federal collection efforts—including administrative wage garnishment and tax refund seizures—will likely intensify the broader economic fallout.
Commentary:
The most important insight from this article may not actually be about student loans. It is about credit reporting.
For many borrowers, the real economic catastrophe is not the debt itself, but the destruction of access to ordinary financial life. A borrower who suddenly cannot refinance a vehicle, qualify for housing, obtain affordable insurance, or even secure utilities is quickly pushed into the exact cycle of desperation and predatory lending that this paper describes.
And that problem is likely about to become substantially worse.
With the dismissal of the SAVE Plan litigation in Missouri v. Trump, the earlier injunction against implementation of portions of the Biden-era regulations has effectively dissolved except to the extent modified by settlement terms. As a result, 34 C.F.R. § 685.209(k)(4)(iv) remains effective from July 1, 2024 through June 30, 2028. That regulation provides borrowers with credit toward Income Driven Repayment and PSLF forgiveness for periods during which the borrower is making required payments under a Chapter 13 bankruptcy plan.
That is a massive development that has still not been fully appreciated by either the bankruptcy bar or student loan servicers.
Chapter 13 may now frequently be the single best IDR option available.
Unlike conventional repayment programs that are driven primarily by gross income formulas, Chapter 13 calculates payment obligations through the Disposable Monthly Income framework under the Bankruptcy Code. The Means Test accounts for real-world expenses including housing, taxes, transportation, healthcare, childcare, and secured debt obligations. For many borrowers, especially those already struggling with rising living costs, Chapter 13 may produce dramatically lower effective repayment obligations than any available non-bankruptcy repayment option.
Hence the name: “Disposable Monthly Income.”
More importantly, under the current regulations, debtors receive month-for-month progress toward forgiveness merely by remaining in a confirmed Chapter 13 plan and making required plan payments—regardless of the amount actually distributed toward student loans and without needing separate “Buchanan” plan language. A debtor in a low-dividend Chapter 13 case could therefore continue accumulating IDR or PSLF credit even while paying little directly toward student loan principal.
That fundamentally changes the strategic role of Chapter 13 in student loan practice.
Of course, there is an obvious problem: student loan servicers are notoriously incompetent at payment accounting.
Consumer bankruptcy attorneys already know this story from mortgage servicing litigation. Mortgage servicers routinely misapply payments, assess unauthorized fees, fail to properly account for escrow obligations, or file inaccurate notices. Those systemic servicing failures became so severe that Congress enacted 11 U.S.C. § 524(i) and Bankruptcy Rule 3002.1(f)-(h) specifically to address postpetition mortgage accounting problems in Chapter 13 cases.
Student loan servicers are, if anything, worse.
The SBPC paper itself references erroneous delinquency reporting, duplicate tradelines, and inaccurate credit reporting by servicers. If servicers already struggle to correctly track ordinary IDR credits outside bankruptcy, there is little reason to expect they will accurately account for Chapter 13 periods where payments may be indirect, partial, or distributed through trustees.
That creates a substantial opportunity for what may become an increasingly important category of litigation: a Student Loan Adversary Proceeding seeking Declaratory Judgment—a “SLAP-DJ.”
Rather than seeking discharge under § 523(a)(8), debtors may increasingly seek declaratory judgments fixing the precise number of months for which they are entitled to IDR and PSLF credit under 34 C.F.R. § 685.209(k)(4)(iv). Such litigation could also seek orders requiring servicers to accurately report those credited Chapter 13 periods to consumer reporting agencies such as Experian, Equifax, and TransUnion.
And that credit reporting component may ultimately matter just as much as the eventual forgiveness itself.
If a debtor receives theoretical forgiveness credit while simultaneously being reported as delinquent, impaired, or in repayment limbo, then the borrower remains trapped in the exact financial collapse this article describes. The borrower may technically progress toward forgiveness while still being rendered effectively unable to obtain housing, transportation, affordable credit, or even employment.
Bankruptcy courts are uniquely equipped to address these problems because they already supervise long-term payment administration systems involving mortgages, taxes, secured claims, and domestic support obligations. The same concerns that led to Rule 3002.1 mortgage accounting protections increasingly exist in the student loan context.
The deeper irony is that Chapter 13—often criticized as overly complex—may now provide struggling borrowers with the most sophisticated and consumer-protective repayment framework available anywhere in federal law.
To read a copy of the transcript, please see:
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