Student Loan Pause Saved Borrowers $195 Billion, But Many Will Default When it Ends

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The federal student loan pause that went into effect during the early days of the COVID-19 pandemic was an economic boon to borrowers, who together saved nearly $200 billion that otherwise would have gone to lenders. But with the pause scheduled to end soon, many of those borrowers will go into default, according to a new report from the Federal Reserve Bank of New York.

See: Student Loans: Private Lenders Ask Biden to Restart Payments
Find: How I Paid Off $55K in Student Loan Debt Over 10 Months

The report, released on March 22, found that the 37 million borrowers who had their federal student loans paused since March 2020 have saved an estimated $195 billion worth of waived payments. However, 10 million borrowers with either private loans or Family Federal Education Loan (FFEL) loans owned by commercial banks weren’t given the same relief, and therefore had to keep making payments during the pandemic.

According to the Fed report, FFEL borrowers not covered by the automatic forbearance have “struggled with their debt payments” over the last couple of years, suggesting that federal borrowers face similar problems, forcing many into delinquency. Direct federal loan borrowers tend to have lower credit scores and higher balances than other borrowers, and also hold more than 85% of outstanding balances.

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Federal student loan payments are slated to resume in May 2022. Some lawmakers want to extend the pause and/or forgive the loans of millions of borrowers entirely, and have called on President Joe Biden to issue an executive order doing just that. But the Biden administration has been focused on other things of late — namely inflation and Russia’s invasion of Ukraine — and there doesn’t appear to be sufficient support in Congress to pause loan payments again.

The Federal Reserve analyzed years’ worth of data on student loan forbearance and found that before the pandemic, the share of borrowers in forbearance remained stable across all three student loan types. But during the pandemic, forbearance rose across all loan types, with direct federal loans rising to a forbearance rate of nearly 100%.

The rate of forbearance for private loans increased from 26% in February 2020 to 33% in May 2020 before steadily declining, while the forbearance rate for FFEL loans increased from 26% in Feb. 2020 to a peak of 36% in June 2020 before dropping back to levels on par with private loans.

According to the recent Fed report, the experience of FFEL borrowers exiting forbearance in late 2020 “foreshadows future repayment difficulties” for federal student loan borrowers once the required payments resume.

This is not just a concern about student loans, either. The Fed report found that FFEL borrowers experienced 33% higher delinquency on their non-student, non-mortgage debt after exiting forbearance than federal borrowers who remained in forbearance.

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Learn: Will Student Loans Become More Expensive When the Fed Raises Interest Rates?
Explore: New Student Loan Forgiveness Proposal Could Pause Payments, but It’s Not Without Critics

“Although borrowers will likely face a healthier economy going forward, [direct federal] loan holders have higher debt balances, lower credit scores, and were making less progress on repayment than FFEL borrowers prior to the pandemic,” the report said. “As such, 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.”

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About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal and Business North Carolina magazine. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting earned awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A native of North Carolina who also writes fiction, Vance’s short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. Two of his short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. His debut novel, Voodoo Hideaway, was published in 2021 by Atmosphere Press.
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