Trouble Ahead for Borrowers if Student Loan Pause Ends

Research shows they’re likely to fall behind on the loans as well as other debt

A couple looks at receipts and financial documents.
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Many borrowers could be in real financial trouble if and when the federal student loan system goes back to business as usual, requiring them to resume making payments, new research suggests.

Key Takeaways

  • Many people with student loans from the federal government could face serious financial trouble if a pandemic-era pause on payment obligations expires, a new analysis suggests.
  • Economists at the New York Federal Reserve found that borrowers with other types of loans, which didn’t get the benefit of the payment pause, encountered financial difficulties during the pandemic. That suggests trouble ahead for those with direct federal loans—a far larger, and on average, financially weaker group. 
  • Many borrowers will likely have a hard time paying what they owe on their student loans as well as other types of debt, the researchers said.

Economists at the Federal Reserve Bank of New York predicted that many borrowers with federal student loans would fall behind not only on those loans but on other debt when pandemic-era forbearance policies come to an end in May. The pandemic relief forbearance, which was meant to be temporary, eliminated interest on federal student loans and allowed people to skip their payments altogether. Some 37 million borrowers with so-called direct federal loans received the forbearance. 

“We believe that Direct borrowers are likely to experience a meaningful rise in delinquencies, both for student loans and for other debt, once forbearance ends,” the economists wrote in a report Tuesday.

The White House has yet to say whether it will allow the pandemic-era forbearance to run out as currently scheduled, extend it for a sixth time, or even forgive some of that student debt. The New York Fed’s research sheds light on potential financial fallout from waking up the federal student loan program from its current state of suspended animation.

The New York Fed researchers based their findings on an analysis of borrowers with loans that did not receive forbearance. Those borrowers had either private loans or loans backed by the government but privately funded, both of which are different from direct loans. Only direct loans, which are funded entirely by the federal government, were affected by the forbearance. 

The New York Fed studied outcomes throughout the pandemic for 10 million borrowers with either private loans or Family Federal Education Loans, which are owned by commercial banks. None of those borrowers received the same relief from interest and monthly payments that people with direct loans did.

Borrowers with private loans fared well during the pandemic, with delinquency rates dropping to a low of 3.6% at the end of 2021. These borrowers tend to have higher credit scores than either borrowers with direct loans or those with FFEL loans, which indicates that their financial situations are stronger.

The FFEL borrowers didn’t do as well. Although delinquency rates initially dropped when the pandemic hit and banks offered some limited forbearance options, they increased as time went on, eventually returning to pre-pandemic levels of 5.4% by the end of 2021. But that’s not all: These borrowers also showed a 33% increase in delinquencies on non-student loan debt. 

People with direct loans are likely to be at an even bigger risk when they have to start making student loan payments again. These borrowers tend to be in a weaker financial position to begin with, with an average credit score of 654 compared with 687 for FFEL borrowers and 713 for private borrowers. They also have higher debt balances and were making less progress on their payments before the pandemic hit, according to the New York Fed researchers. 

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