Student Loan Delinquencies Expected To Spike In May With End To Freeze That Waived $195 Billion In Payments

Topline

In less than six weeks, a majority of federal student-loan borrowers could be forced to start making payments on their debt for the first time in more than two years, and based on repayment trends during the pandemic, economists at the New York Federal Reserve predict borrowers who benefited from nearly $200 billion in waived payments will face rising delinquencies on student loans—and other debt—once the unprecedented relief ends.

President Joe Biden hasn’t yet said whether the pause on student loan repayment—set to expire on May … [+] 1—will be the last.

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Key Facts

As a result of the Department of Education’s nationwide pause on student loan repayment during the pandemic, nearly 37 million borrowers have not been required to pay their federal student loans since March 2020, resulting in an estimated $195 billion worth of waived payments through April 2022, according to a New York Fed report released Tuesday.

Since the forbearance started, a majority of borrowers of direct loans, which represent some 90% of the student-loan market, haven’t made payments, including about 83% of those facing growing student debt before the pandemic and 66% of those who were paying down their balance, the Fed researchers note.

Despite a healthier economy going forward, the economists say credit-report data on repayment of Family Federal Education Loans, or federally backed private loans that were not granted the same relief, indicate there will likely be a “meaningful rise” in delinquencies on Direct loans once the freeze expires.

Even with three rounds of stimulus payments likely aiding repayment, FFEL borrowers still faced rising delinquencies during the pandemic—an experience that “foreshadows future repayment difficulties” for Direct loan holders, who generally have higher debt balances and lower credit scores.

That difficulty will likely extend to non-student loan debt: On average, FFEL borrowers experienced 33% higher delinquency on other debt after exiting private student-loan forbearance, which typically only lasted a few months.

Big Number

$1.3 trillion. That’s roughly how much debt is outstanding from Direct federal student loans, compared to $1.5 trillion in overall student-loan debt, according to the New York Fed.

Key Background

In December, the Department of Education announced the nationwide pause on federal student loan repayment would be extended from January 31 to May 1, marking the fifth time the federal government suspended monthly student loan payments during the pandemic. In addition to no forced repayment, borrowers haven’t faced additional interest or collections since the pause began in March 2020. “We know that millions of student loan borrowers are still coping with the impacts of the pandemic and need some more time before resuming payments,” Biden said at the time.

What To Watch For

Policymakers have considered several proposals to soften the end of the forbearance program, including temporarily not reporting missed payments to credit bureaus and outright cancellation of federal student loans, the Fed’s Jacob Goss, Daniel Mangrum and Joelle Scally said Tuesday. “Suspending the reporting of delinquencies will certainly… allow borrowers to better ease into repayment, but these repayment issues will still exist under the surface,” they caution, adding that the concerns have motivated a debate on student loan cancellation that’s likely to pick up traction once relief expires.

What We Don’t Know

Whether Biden will extend the freeze again. Though White House officials were hesitant to do so late last year, recent signals from the Biden administration suggest the White House may soon extend the moratorium. Most recently, the Education Department instructed federal student loan servicers not to inform borrowers that payments will resume on May 1, according to an email first reported by Politico.