How the Student Loan Pause Has Played Out for Borrowers | Smart Switch: Personal Finance

During the lull in federal student loan payments, new data shows many borrowers have used that extra budget space to shore up their overall finances.

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Two years after the chaos of the pandemic prompted Congress to pause federal student loan payments, new data shows many borrowers have used that extra budget space to shore up their overall finances. Some have inched closer to eligibility for student loan forgiveness.

Economists and lending experts say it’s unclear how long that stability will last when the payment break, currently scheduled for May 1, ends. Among the 26.6 million people expected to pay immediately, some will inevitably struggle, including unemployed borrowers and those whose wages have dropped. did not keep up with rising inflation.

Evan White, executive director of the California Policy Lab at the University of California, Berkeley, says delinquencies and eventually defaults are expected to rise when student loan payments resume. That 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 pay pauses could have been supporting people in a way that makes them look like they’re doing much better than they are, White says. “Or it could be that all of those supports build people to a better place in a way that will have some sustainability.”

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All borrowers can make a plan to manage upcoming payments by contacting their administrators, the companies contracted to administer the federal loans. If you are unsure of your ability to resume payment, an income-driven repayment plan is your best option.

Here’s how the federal student loan payment pause has affected borrowers.

General finances improved

A lot can happen to your finances in two years, but the pause was objectively good for federal direct student loan borrowers in several ways:

  • Borrowers, on average, experienced $210 of breathing room per month. Since the payment pause began, 37 million borrowers have collectively saved an estimated $195 billion in exempt payments, according to the New York Federal Reserve’s March report. Each month, borrowers saved about $210 on average, according to the California Policy Lab.
  • Balances did not grow. No interest accrued during the pause, meaning borrowers’ balances did not increase.
  • Borrowers reduced 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 loan or mortgage, the California Policy Lab found. White says, without However, it is more difficult to draw a direct line with the pause as the cause of these changes.
  • Credit scores increased. “The people who saw the biggest boost to their credit aren’t the doctors and lawyers, it’s the people who are struggling who are now the beneficiaries of this extraordinary public policy,” says Mike Pierce, executive director of the Borrower Protection Center. Student. a nonprofit advocacy group. Borrowers across the board saw credit score increases, with the biggest gains among those with the lowest scores and those with a recent delinquency, according to the California Policy Lab.

Some borrowers are closer to forgiveness

Each month of the break could count toward borrowers’ total need to be eligible for loan discharge through existing programs.

For public service workers, each unpaid month has counted toward the 120 payments needed for forgiveness through the Public Service Loan Forgiveness program. To qualify, borrowers had to be working full time for a utility employer during the break.

Borrowers on income-driven repayment plans meant to keep monthly payments manageable can also count each month without payment toward the 240 or 300 months needed for loan repayment.

A borrower enrolled in these forgiveness 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 on more traditional repayment plans.

Borrowers who kept paying took advantage of 0% rates

Zero percent interest meant that borrowers who could afford to make the payments could pay down their debt faster, but they had to do so by voluntarily contacting their servicers. The New York Federal Reserve report says that more than 18% of borrowers with direct loans continued to make payments.

Those who made payments included borrowers with a history of actively paying off their balances before the pandemic, as opposed to those whose balances were rising due to interest accrual.

A fraction of delinquent borrowers took the opportunity

The payment pause offered delinquent student loan borrowers a rare opportunity to get their loans back in good standing, eliminating default from credit reports, without having to make a single payment to do so.

Student loan rehabilitation stipulates that borrowers must make nine payments at an agreed amount in a possible 10 months. Months spent in indulgence count.

Data from the Department of Education shows that some borrowers took advantage of that: a total of 602,000 borrowers rehabilitated their loans in 2020 and 2021. But this is likely to be 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, they were 5.1 million.

Even more disheartening, 25% of delinquent borrowers do not have an email on file with the Department of Education, according to the Government Accountability Office report. It’s unclear how those borrowers will be contacted before collections resume six months after the pause is lifted.

Borrowers with lost private loans

Not all student loan borrowers saw their finances improve as a result of the pause, including private loan borrowers and Family Federal Education Loan program borrowers with business loans.

Most FFEL borrowers whose loans are privately owned were not placed in any forbearance and had trouble making payments, according to the New York Fed’s March report. Some FFEL borrowers whose loans were placed in forbearance saw delinquency rates increase after the end of those periods. And FFEL borrowers also experienced 33% more delinquencies on other non-loan 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 break didn’t apply to them until the delinquency hit their credit report. “Still today people say, ‘Why am I getting a bill?’” she says.

Private loan borrowers did not see their loans paused, but they also did not see significant increases in delinquencies since the start of the pandemic, according to data from Measure One, a data and analytics firm.

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