Many Federal Student Loan Borrowers Risk Delinquency When Forbearance Ends, New York Fed Warns
Nearly 37 million Americans on direct federal student loans are expected to resume payments in May after more than two years of COVID-19 emergency forbearance. However, these borrowers may be at risk of delinquency when payments resume, according to a new report of the Federal Reserve Bank of New York.
Using Equifax credit report data, New York Fed economists determined the impact of pandemic forbearance on repayment progress and delinquency rates for consumers with different types of student loans. This includes the 10 million Americans who were not eligible for the payment pause because they have private student loans or Federal Family Education Loans (FFEL) program loans held by commercial banks.
Although private student borrowers were able to speed up repayment during the pandemic, economists found that borrowers with FFEL loans struggled to make their payments. It could portend “future repayment difficulties for direct borrowers” – who tend to have lower credit scores and higher loan balances – they said, when the forbearance period ends in a bit more than a month.
Keep reading to learn more about the New York Fed report, as well as how federal student loan borrowers can prepare for the end of forbearance with income-based repayment, deferral federal or student loan refinance. You can visit Credible to compare private student loan rates and determine if refinancing is the right strategy for you.
BIDEN ADMINISTRATION CONSIDERING ANOTHER STUDENT LOAN PAYMENT BREAK EXTENSION
New York Fed predicts ‘significant increase’ in student loan delinquencies after forbearance
Borrowers of direct federal loans tend to have higher debt balances and lower credit scores than borrowers with FFEL loans or private student loans, according to the report. They were also making less progress in repaying loans before the pandemic began.
And although FFEL borrowers are better equipped financially with better credit scores and lower loan amounts, they still struggle to make payments while forbearing. Thus, New York Fed researchers estimate that “direct borrowers will likely experience a significant increase in delinquencies, both for student loans and for other debt, once forbearance ends.”
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Borrowers who are at risk of becoming delinquent after forbearance may consider enrolling in an Income-Driven Repayment (IDR) plan or applying for an additional federal student loan deferral. Another way to avoid default is to refinance a private student loan at a lower interest rate. Refinancing student loans can help some borrowers lower their monthly payments, making repayment easier.
It is important to note, however, that refinancing federal student debt into a private loan makes borrowers ineligible for certain protections like IDR plans and certain student debt forgiveness programs, including the Loan Forgiveness Program. of the public service (PSLF). You can read more about student loan refinancing on Credible to determine if this option is right for you.
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Policymakers urge action to help borrowers repay
Student loan delinquency can leave a lasting negative mark on a borrower’s credit report. Having bad credit can make it harder for consumers to secure favorable borrowing terms on a number of financial products, from mortgages to car loans.
Department of Education officials have proposed that federal student loan services should temporarily suspend reports defaulting borrowers to the credit bureaus when payments resume. But while it may “allow borrowers to repay better,” it won’t solve the underlying problems, New York Fed researchers said.
If a borrower is in arrears for an extended period, they may default on their student loans – which has far more serious consequences. In the event of default, the entire loan balance plus interest becomes immediately due through a process called acceleration. Loan servicers can sue defaulting borrowers to collect the balance, which can lead to wage garnishment and suspension of federal benefit payments.
To deal with the long-term consequences of delinquency, some Democrats have called for federal student loan forgiveness. Although the Department of Education has forgiven about $16 billion in student debt since President Joe Biden took office, his administration has so far been unable to enact a widespread pardon.
With the future of student debt forgiveness uncertain, borrowers may be looking for other ways to prepare for federal student loan repayment in May. Besides IDR plans and federal deferment programs, another option to consider is student loan refinancing. You can browse current student loan rates from private lenders in the table below and use Credible’s student loan calculator to estimate your new loan repayments.
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