Americans face credit hit as student debt defaults again | Education

In a report released last month, the Government Accountability Office estimated that about 10 million borrowers — more than a quarter of the total — were behind on their payments at the end of January. About two-thirds of them were more than three months behind, meaning they would normally be classified as seriously delinquent.

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Right now, those borrowers are protected from taking a hit to their credit scores because the Biden administration has ordered a one-year moratorium (starting after the post-pandemic reopening last year) during which late student payments cannot be included on credit reports.

But when that protection ends next month, a large proportion of student borrowers will likely default.

“We will be monitoring these numbers closely as we begin to see delinquencies reported once the moratorium ends,” said Liz Pagel, senior vice president at TransUnion, a consumer credit reporting agency.

After several years of amnesty, the effect will be to restrict access to credit for millions of households, at a time when the labor market is also slowing and high interest rates are affecting budgets.

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Lower credit scores make it harder for consumers to buy homes or cars, start a business or get loans to cushion economic shocks. Women and Black and Hispanic Americans, who tend to have more student debt, could be disproportionately affected. By age, Americans in their 30s and 40s will likely be hardest hit.

It is difficult to determine exactly how many student borrowers are at risk of having their credit scores affected. The Education Department did not immediately respond to requests for an update on the January figures cited in the GAO report.

Education transfers to the Treasury suggest there has been a steady decline in student loan payments over the past year. Last summer, when payments resumed, monthly transfers were about $7 billion, roughly the same level as before Covid hit. Last month, the figure fell to $4.1 billion, the lowest since 2014, excluding the pandemic freeze.

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But that decline doesn’t necessarily mean more borrowers are defaulting. Many are also enrolling in new government programs that allow them to reduce payments.

While the Supreme Court blocked its flagship loan forgiveness initiative, the Biden administration has rolled out other programs to help student borrowers. Chief among them is the SAVE program, which ties monthly payments to household size and income and has enrolled about 8 million borrowers.

“Under that plan, payments for many people will be reduced to zero or a fraction of the usual amount,” said Adam Looney, a senior fellow at the Brookings Institution who specializes in student debt issues. Greater enrollment in that plan could help explain why monthly payments are lower, he said.

In April, the Department of Education said average monthly payments had fallen from $348 before the pandemic to $299, largely as a result of those programs. To further complicate the picture, the SAVE plan has also since been halted by the courts.

In total, through various programs, the Biden administration has forgiven about $168.5 billion in student debt. After rising steadily for decades, the national total has held steady at about $1.6 trillion since the end of 2020, according to the Federal Reserve Bank of New York.

Still, before the pandemic freeze, student loan delinquencies and defaults were much higher than those on other types of debt. That trend looks set to resume, though it will take some time to determine the precise level amid all the legal confusion.

Pagel said TransUnion is seeing an especially sharp deterioration in repayment rates among high-risk student borrowers, with less than 10% of them current as of June.

While delinquency reporting will resume in October, he said a full assessment of payment rates will not be possible until December at the “earliest possible.”