Mar 22, 2022 - Economy

Return of student loan payments could spell trouble for borrowers

Data: New York Fed Consumer Credit Panel/Equifax; Chart: Axios Visuals

Tens of millions of Americans haven’t had to make payments on their student loans the last two years — and a new study suggests many could struggle when bills come due again.

Why it matters: Payments are scheduled to resume May 1 on federal direct student loans. President Biden is weighing whether to extend the moratorium on payments again, while lawmakers debate the possibility of cancelling some student debts altogether.

Driving the news: Nearly 37 million borrowers have saved about $195 billion from the moratorium through April 2022, according to a report released Tuesday by the Federal Reserve Bank of New York.

  • The researchers found that student loan borrowers who didn’t benefit from the extended moratorium had 33% higher rates of delinquency on other debt (excluding mortgages) than those who did.
  • Borrowers coming off the moratorium now are “likely to experience a meaningful rise in delinquencies, both for student loans and for other debt, once forbearance ends,” researchers Jacob Goss, Daniel Mangrum and Joelle Scally wrote.

The big picture: As a general rule of thumb, Republicans on Capitol Hill oppose another extension of the payment moratorium, while Democrats support an extension, reduction or cancelation of loans.

  • The Education Department recently told student loan servicers to refrain from informing borrowers that their payments would soon resume, Politico and the Wall Street Journal reported.

Be smart: Reengaging borrowers after two years of a moratorium will be challenging.

  • The Education Department doesn't have valid email addresses for 13% of borrowers covered by the moratorium, though it may be able to reach them by other means, according to a recent report by the Government Accountability Office.

Of note: 210 organizations advocating for borrowers wrote a letter to President Biden on March 7 urging him to extend the payment pause.

  • "It is clear that payments should not resume until your administration has fully delivered on the promises you made to student loan borrowers to fix the broken student loan system and cancel a substantial amount of federal student debt," the groups wrote.

The other side: Republicans say that forgiving student loans would disproportionately benefit the wealthy and exacerbate inflation.

  • And some 10 million borrowers with private loans or Family Federal Education Loans (FFEL) held by commercial banks are not covered by the moratorium.

The bottom line: The argument over the payment moratorium is becoming a larger fight over the broader student loan system.

Go deeper