In another sign of post-pandemic normalcy, the pause in student loan repayments is set to expire in August, which is likely to cause credit damage to millions of borrowers, according to the Federal Reserve.
Most student borrowers (60%) have not made any payments since March 2020, when collections on defaulted student loans were also suspended, according to New York Fed analysts.
“Once the provision expires, there could be deterioration in credit risk profiles, which could impinge on this group’s general access to credit,” the Fed note said.
On the positive side, many borrowers used the extra money and time to improve their finances.
Default rates on credit cards, auto and mortgage debt have fallen throughout the pandemic. Average risk scores increased by 35 points to 670 through 2021.
The twist is that the borrowers who made payments during the period tend to be the ones who reduced their other debts.
Even these borrowers were starting to struggle at the end of 2021, when other delinquencies began to rise. But those who made no student loan payments were in worse shape, with slightly more credit card debt than before the pandemic.
Numerous studies have shown that student borrowers often cannot take on many other debts, such as mortgages, so they have fewer of these burdens. While this isn’t necessarily a happy circumstance for young people starting their families and careers, it does mean that delinquencies are unlikely to spill over into the broader consumer credit market, according to the report.
The initial loan forbearance was only supposed to last 60 days, but was extended until August 31, almost 30 months since its launch. Meanwhile, $84 billion has not been paid.
“Overall, these borrowers have seen their financial situation improve during the pandemic, but there are signs of distress,” according to the report. “Some of these borrowers may not be ready to resume payments once the forbearance expires.”
Borrowers who made at least one payment were in a better position to start paying again once the break expired. They were able to reduce their balance by 15%, or about $52 billion, but they also reduced their other debts. For example, they reduced credit card debt by 10%.
Of those who made payments, 40% paid at least 12 months and 30% made three or less.
Who is in trouble?
The Biden administration has not said whether it will allow the last break to expire on August 31.
However, President Joe Biden is apparently set to forgive up to $10,000 in student loan debt for singles earning less than $150,000 or couples earning less than $300,000, according to media reports, which also said the program would likely be limited to undergraduate debt. Biden had promised the $10,000 pardon during the presidential campaign.
Cancellation would settle the balances of a third of borrowers, while 20% would see their debt reduced by at least half, according to the Federal Reserve, with 53% of borrowers owing less than $20,000. But that debt is only 13% of the total, meaning fewer borrowers are taking out large loans.
But those with the least debt might actually be less likely to pay because they were less likely to have graduated. Those with more debt tend to have higher degrees and a greater ability to pay.
“Among those who had outstanding debt for their own education, 18% were behind in their payments. Those who did not graduate were the most likely to be behind,” according to a wellbeing report May 2021 Fed Economic Report. “Thirty-one percent of adults who had outstanding student loans and had less than an associate’s degree said they were behind. That compares to 22 percent of borrowers The delinquency rate was even lower among borrowers with a bachelor’s degree (9%) or graduate degree (8%).
According to the Fed, first-generation college students were more likely to be behind on their payments than those with a parent who had finished school. First-generation students were three times more likely to be late.
Black and Hispanic youth were more likely to be behind on debt and fully repay loans, while Asian youth were more likely to maintain payments and repay loans.
“These trends partly reflect differences in graduation rates, institutions attended, and salaries for a given educational credential,” according to the report.
Fed analysts said the difficulty of payments has more to do with the institutions attended than the participants. Students at private for-profit institutions were much more likely to be in arrears, with 26% in late payments, compared to 5% at private non-profit schools and 10% at public schools.
“Indeed, when controlling for race and ethnicity, first-generation status, and institutional selectivity, the relationship between attendance at for-profit institutions and defaulting on student loans persists. “, according to the report. “This suggests that the high default rates for participants at for-profit institutions reflect the characteristics of the schools and are not simply due to the characteristics of their students.”
Steven A. Morelli is editor for InsuranceNewsNet. He has over 25 years of experience as a journalist and editor of newspapers and magazines. He was also vice-president of communications for an association of insurance agents. Steve can be reached at [email protected]
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