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The federal student loan pause that took effect at the start of the COVID-19 pandemic was an economic boon to borrowers, who together saved nearly $200 billion that would otherwise have gone to lenders. But with the pause set to end soon, many of those borrowers will be in default, according to a new report from the Federal Reserve Bank of New York.
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The report, released March 22, found that the 37 million borrowers whose federal student loans have been suspended since March 2020 have saved about $195 billion in canceled payments. However, 10 million borrowers with private loans or Federal Family Education Loans (FFEL) held by commercial banks did not receive the same relief and therefore had to continue making payments during the pandemic.
According to the Fed’s report, FFEL borrowers not covered by automatic forbearance have “struggled to service their debts” over the past two years, suggesting that federal borrowers are facing similar issues, forcing many to delinquency. Direct federal borrowers tend to have lower credit scores and higher balances than other borrowers, and also hold over 85% of outstanding balances.
Repayment of federal student loans is expected to resume in May 2022. Some lawmakers want to extend the pause and/or cancel loans entirely for millions of borrowers, and have called on President Joe Biden to issue an executive order to that effect. But the Biden administration has recently been focused on other things — namely inflation and Russia’s invasion of Ukraine — and there doesn’t seem to be enough support in Congress to suspend the plans again. loan repayments.
The Federal Reserve analyzed years of data on student loan forbearance and found that before the pandemic, borrowers’ share of forbearance remained stable for all three types of student loans. But during the pandemic, forbearance has increased across all types of loans, with direct federal loans hitting nearly 100% forbearance.
The private lending forbearance rate rose from 26% in February 2020 to 33% in May 2020 before steadily declining, while the FFEL lending forbearance rate rose from 26% in February 2020 to a peak of 36 % in June 2020 before dropping back to levels comparable to private lending.
According to the Fed’s recent report, the experience of FFEL borrowers exiting forbearance at the end of 2020 “foreshadows future repayment challenges” for federal student loan borrowers once required payments resume.
It’s not just a concern about student loans either. The Fed report found that FFEL borrowers experienced 33% higher arrears on their non-student, non-mortgage debt after leaving forbearance than federal borrowers who remained in forbearance.
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“Although borrowers will likely face a healthier economy in the future, [direct federal] loan holders have higher debt balances, lower credit scores and progressed less in repayment than FFEL borrowers before the pandemic,” the report said. “As such, we believe direct borrowers are likely to experience a significant increase in delinquencies, both for student loans and other debt, once forbearance ends.”
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