Some Americans racked up even more debt during the student loan payment pause that they can’t pay


The federal student loan payment pause was a boon for many borrowers, who were able to save up for homes, pay down the debt significantly, or at least catch up on other bills. But new research finds that borrowers who were already in financial distress prior to the pandemic may be coming out of the payment hiatus, which ends in September after more than three years, in even worse financial standing.

Distressed borrowers may have initially benefitted from the three-plus year pause on student loan payments, but they will have to start making payments again while even further in debt of all kinds than they were prior to the pandemic, according to Heather Tookes, a professor of finance at Yale.

Using credit agency data, Tookes and two other researchers compared how distressed federal borrowers—defined as those who made a delinquent student loan payment in the 24 months preceding the pandemic—and those with private loans, who did not benefit from the payment pause, fared since the onset of the pandemic.

At first, the federal borrowers fared well: Their credit scores saw a significant jump, by an average of 70 points, six months after the pause started. But many of the borrowers used their improved scores—combined with some excess cash each month—to take on more debt in the form of auto loans or charged on credit cards. In fact, average credit card debt increased by more than 12% compared to borrowers with private loans.

The research then found that not only were vulnerable borrowers racking up more debt, but delinquencies were also rising on credit cards and auto debt. One bucket of debt that did not increase for this group? Mortgage debt. The research doesn’t extrapolate why that is, however it is possible that mortgage lenders look at a much more holistic financial picture than, say, an auto lender does.

On top of that, the researchers estimate vulnerable federal borrowers now have 12.1% more student loan debt than those who did not have their loans put into forbearance. They worry that the financial distress of those borrowers, in particular, will accelerate when payments resume in October.

Again, Tookes’ research looks at already distressed borrowers. For many, the payment pause was a time to get ahead on other financial goals or simply keep up with the rising cost of living. Some borrowers took advantage of the 0% interest to pay off their debt completely.

Tookes told Yale Insights she isn’t sure exactly what the takeaway is yet. The new auto loan debt, for example, was driven mainly by new loans—it is possible vulnerable borrowers were finally able to buy a vehicle they needed. The researchers will continue to track borrowers once payments actually resume to see if what other analysts have called the “student loan cliff” materializes.

“In the beginning [of the pandemic] there was a lot of uncertainty,” Tookes said. “We didn’t know what was happening and people were not working. The better question is whether extended forbearance, where all borrowers with federally held student loans were automatically enrolled into the program for more than three years, was helpful.”

Those who will struggle to afford their federal payments have a couple of options. They can opt to enroll in an income-driven repayment plan, like the new SAVE plan, which can cut payments to as little as $0 per month. Borrowers can sign up for that plan now.

And, as a last resort, they can put off paying their student loans a little longer. Ahead of payments resuming, the Biden administration announced a one-year grace period for federal borrowers, from Oct. 1, 2023, to Sept. 30, 2024. During that time, missed payments will not be reported to credit bureaus, and borrowers will not be considered delinquent if they don’t pay. Interest will still accrue on balances, but it won’t capitalize, meaning it won’t be added to the principal.

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