Student Loan Repayment Looms Over Consumer Debt Picture

Household finances may be in good shape now, but what happens come May?

College student concentrates while studying in the student center -
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Household finances as a whole have held up surprisingly well during the pandemic, economists say, but there’s a big question hanging over the picture: What’s going to happen when people have to start making their federal student loan payments again?

While consumers’ overall debt balances increased by $1 trillion in 2021—more than they have in any year since 2007—the share of loans that were 90 days or more delinquent in the final quarter of the year was smaller than it’s been in any quarter going back to at least 2003, the Federal Reserve Bank of New York’s quarterly report on consumer credit showed this week.

Yes, debt from mortgages, car loans, and credit cards increased as buyers absorbed rising costs (especially for houses and cars), but higher savings rates are reassuring to economists, who say the country is in relatively strong shape to handle that debt.

What’s less clear is what may happen come May, when the pandemic-era reprieve on federal student loan obligations—the vast majority of all student loan obligations—is scheduled to end, and an estimated 26.6 million borrowers are no longer allowed to skip payments, researchers at the New York Fed said during a virtual press briefing Tuesday.

“That’s a major question,” one researcher said. “We definitely expect to see an increase in the delinquency rate.”

In fact, Education Department officials are anticipating enough of a challenge that they plan to “ease the transition” by temporarily skipping any reports of missed payments to credit rating bureaus, the Government Accountability Office said in a recent report. Since the government’s pause on interest and payment obligations began at the start of the pandemic, 18% of federal student loan borrowers have made at least some voluntary payments, according to the New York Fed researchers.

In the fourth quarter of last year, when overall consumer debt balances increased by $333 billion to $15.6 trillion, student loan balances barely budged, actually dropping by $8 billion to $1.58 trillion, the NY Fed’s data shows. Why? Part of it was the voluntary payments, the researchers said. It was also that the criteria for loan forgiveness for disabled borrowers and public servants was vastly expanded last year and that we saw a decrease in college enrollment, they said.

It’s unclear how those student loan statistics will change once payments resume, the researchers said, and what will happen to the economy as a result.

"If borrowers fall behind on their federal student loan debt, the risk and penalties largely fall on the borrower,” said Daniel Mangrum, an economist at the New York Fed, in a follow-up email. “However, the risk could spill over to the broader economy if payment difficulties spill over to other debt obligations."

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  1. Federal Reserve Bank of New York. “Quarterly Report on Household Debt and Credit, 2021 Q4.”

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