TransUnion previously reported that consumers who have recently gone delinquent on their federal student loans because of policy changes have seen their credit scores drop by 60 points on average. That decrease might shift those individuals into the subprime credit tier.

Cox Automotive chief economist Jonathan Smoke acknowledged how complicated the shift has made the subprime portion of auto finance.

“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,” Smoke wrote in a commentary posted on Monday.

To help explain the situation, Smoke sought insight from Shams Blanc, who is vice president and head of scores for the auto industry at FICO.

Blanc told Smoke that approximately 2 million consumers who already had an auto loan had a student-loan delinquency added to their credit file during the first quarter. That happened because federal forbearance officially ended in October and delinquency reporting resumed

Blanc pointed out that some individuals — especially ones between 18 and 29 — watched their credit scores drop by 100 points.

“Scores didn’t make these consumers riskier — they revealed risk that had been hidden for several years,” Blanc told Smoke. “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.”

After learning those metrics, Smoke explained what it can mean within the other industry tracking Cox Automotive does, including the Dealertrack Credit Availability Index that has improved in recent months.

“As FICO’s research suggests, the treatment of student loans over the last four years complicates expectations for loan performance,” Smoke wrote. “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,” Smoke continued.

“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,” Smoke went on to say. 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,” he added.

Smoke closed by reiterating a point that finance company executives and industry watchers have mentioned for years.

“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,” Smoke said. “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,” Smoke added.