How the Student Loan Pause Has Been for Borrowers | Smart Change: Personal Finances
Two years after the chaos of the pandemic prompted Congress to suspend federal student loan repayments, new data shows that many borrowers used that extra room in the budget to shore up their overall finances. Some have come closer to qualifying for student loan forgiveness.
Economists and credit experts say it’s unclear how long that stability will last when the payment pause ends, currently scheduled for May 1. Among the 26.6 million people expected to start repaying immediately, some will inevitably struggle, including unemployed borrowers and those who have not kept up with rising inflation.
Evan White, executive director of the California Policy Lab at the University of California, Berkeley, says he expects delinquencies to rise and possibly defaults when student loan repayments resume. This echoes recent projections from a March 2022 New York Federal Reserve report and a January 2022 report from the Government Accountability Office.
Pandemic-related supports like stimulus checks and the payment pause could have supported people in ways that make them feel like they’re doing much better than they are, White says. “Or it could be that all of that support is building people to a better place in a way that will have some durability.”
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All borrowers can establish a plan to handle upcoming payments by contacting their managers, the companies hired to handle federal loans. If you’re unsure of your ability to resume payments, an income-based repayment plan is your best option.
Here’s how the suspension of federal student loan payments has affected borrowers.
Overall finances have improved
A lot can happen to your finances in two years, but the break has been objectively good for direct federal student loan borrowers in several ways:
- Borrowers, on average, benefited from $210 in monthly flex. Since the start of the payment pause, 37 million borrowers have collectively saved about $195 billion in canceled payments, according to the March report from the New York Federal Reserve. Each month, borrowers saved about $210 on average, according to the California Policy Lab.
- Sales have not increased. No interest accrued during the pause, meaning borrower balances did not increase.
- Borrowers reduced their other debts. About 44% of borrowers reduced the amount of debt on their credit cards and 6% of borrowers increased payments on other loans, such as a car or mortgage, the California Policy Lab found. White says, however, it’s harder to draw a direct line to the break being the cause of those changes.
- Credit ratings have gone up. “The people who have seen their credit rise the most are not doctors and lawyers, it is the struggling people who are now the beneficiaries of this extraordinary public policy,” said Mike Pierce, executive director of the Student Borrower Protection Center. , a non-profit advocacy group. Borrowers at all levels have seen their credit scores improve, with the most gains among those with the lowest scores and those who have recently been in default, according to the California Policy Lab.
Some borrowers are closer to forgiveness
Each month of the pause could count towards the total borrowers need to become eligible for loan release through existing programs.
For civil service workers, each month of non-payment counted towards the 120 payments needed for forgiveness under the civil service loan forgiveness program. To qualify, borrowers had to work full-time for a public service employer during the break.
Borrowers with income-driven repayment plans — aimed at keeping monthly payments manageable — can also count each month of nonpayment toward the 240 or 300 months needed for loan discharge.
A borrower enrolled in these discount programs since the pause began in March 2020 has been credited with at least 24 payments toward their goal. The same is not true for borrowers in more traditional repayment plans.
Borrowers who continued to repay took advantage of 0% rates
Zero percent interest meant that borrowers who could afford to make payments could potentially reduce their debt faster, but they had to do so by voluntarily contacting their services. The New York Federal Reserve report indicates that more than 18% of borrowers with direct loans continued to make payments.
Among those who made payments were borrowers with a history of actively paying down their balances before the pandemic, as opposed to those whose balances were growing due to accrued interest.
A fraction of borrowers in default seized the opportunity
The payment pause offered defaulting student loan borrowers a rare opportunity to get their loans back in good standing — by removing the default from credit reports — without having to make a single payment to do so.
The student loan rehabilitation stipulates that borrowers must make nine payments in an agreed amount over 10 possible months. The months spent in abstention count.
Data from the Department of Education shows that some borrowers have benefited: a total of 602,000 borrowers rehabilitated their loans in 2020 and 2021. But this is probably a drop in the ocean. Department data shows that at the end of the first quarter of 2020, 5.7 million borrowers were in default; at the end of 2021, it was 5.1 million.
Even more disheartening, 25% of borrowers in default did not register an email with the Department of Education, according to the Government Accountability Office report. It remains unclear how those borrowers would be reached before collections resume six months after the pause was lifted.
Borrowers with private loans are missed
Not all student borrowers saw their finances improve as a result of the pause, including private borrowers and Family Federal Education Loan program borrowers with commercial loans.
Most FFEL borrowers whose loans are held by individuals had no forbearance and struggled to pay, according to the March report from the New York Federal Reserve. Some FFEL borrowers whose loans were placed in forbearance periods saw delinquency rates increase after those periods ended. And FFEL borrowers also experienced 33% higher delinquencies on other non-loan related debt after forbearance ended.
Betsy Mayotte, president and founder of the Institute of Student Loan Counselors, says most FFEL borrowers didn’t realize the payment pause didn’t apply to them until delinquencies reached their file. credit. “Even today, I make people say, ‘Why am I getting a bill?’ “says Mayotte.
Private borrowers haven’t had their loans suspended, but they haven’t seen a significant increase in delinquencies since the start of the pandemic either, according to data from Measure One, a data and analytics firm.
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