People who have federal student loans are struggling disproportionately to pay their other bills, even though student loan payments have been suspended since March 2020.
Those borrowers would find themselves in even deeper financial trouble when payments finally resume if President Joe Biden’s student loan forgiveness plan is stalled, suggests a study by the New York Federal Reserve.
New York Fed economists analyzed the credit reports of borrowers with federal student loans and compared them to other types of student loan borrowers and to people with no student debt at all. They found that those with student loans potentially eligible for Biden’s forgiveness plan are more likely than their peers to be behind on credit card and auto loan debt right now.
“These payment defaults suggest that some federal student loan borrowers are having difficulty meeting their monthly debt obligations even if student loan payments are not required,” the economists wrote. “We expect these delinquency patterns to worsen if federal student loan payments resume without relief.”
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For context, the typical monthly payment for student loan borrowers is about $222, according to a separate Federal Reserve study.
Federal student loan borrowers have not been required to make such payments in the past 34 months. When payments resume later this year, assuming the broad student loan relief is reversed by the Supreme Court, already struggling borrowers would face the additional burden of resumed payments that will likely amount to hundreds of dollars or more. more per month.
The suspension of federal student loan payments has been a lifeline for millions of borrowers during the pandemic. Former President Donald Trump initially enacted the payment freeze, which has since been extended eight times.
The latest extension to the payment suspension, made by the Biden administration, is expected to expire by the end of the summer after the Supreme Court rules on Biden’s student loan forgiveness plan. Currently, Biden’s plan to forgive up to $20,000 in debt per borrower is on hold due to legal issues. The Supreme Court has agreed to hear the case and oral arguments will begin next month. A decision is expected by June. Regardless of the outcome, the suspension of payments will be lifted two months after the Supreme Court ruling.
However, according to the study, if Biden’s plan is cleared by the Supreme Court, mass delinquencies and defaults for student loan borrowers could be avoided. The authors estimate that approximately $441 billion in student loan debt is eligible for discharge. For at least 16 million borrowers, that translates into a full forgiveness of their outstanding student debt.
“If the Biden administration’s pardon plan is ultimately allowed to happen, it will mark the largest mass extinction of consumer debt in modern history,” the authors wrote. “Nearly forty percent of federal student loan borrowers would no longer have a balance, and millions more would have a lower monthly payment when payments resume.”
Even as Biden’s plan proceeds, the authors note that it is no panacea and the underlying problem of the rising costs of attending college remains.
“Amid rising tuition costs, student loan balances will resume their ascent, leaving the challenge of financing higher education to the younger generation,” they wrote. “In the absence of direct policies to address this growing burden, taxpayers could be called upon to seek help again in the future.”
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