File: On May 12, 2023, in Los Angeles, at Southern California’s 140th commencement ceremony, graduates embrace After being suspended for three years due to the COVID-19 pandemic, interest on federal student loans has begun to accrue once more. There is still one month left for borrowers to make loan repayments. (Sarah Reingewirtz/The Orange County Register via AP, File) Share.
NEW YORK (AP) — Following a three-year hiatus due to the COVID-19 pandemic, interest on federal student loans has begun to accrue once more.
Don’t panic; you still have at least another month before you have to begin repaying your loans.
Student Loan Forbearance and Delinquency during the Pandemic
The chart below shows the share of borrowers in either deferment or forbearance (left) and the share of borrowers with a student loan at least ninety days delinquent but not in default (right) since the first quarter of 2019. Our calculation of the delinquency rate differs from the typical calculation in the New York Fed’s Quarterly Report on Household Debt and Credit because we focus on borrowers instead of balances and we exclude defaulted loans. Prior to the pandemic, the share of borrowers in forbearance remained stable across all three student loan types with FFEL loans and private loans at around 26 percent and Direct loans at roughly double the rate largely due to the higher share of borrowers in in-school deferment. After the onset of the pandemic, forbearance rose across all loan types with Direct loans rising to almost 100 percent due to administrative forbearance. Consequently, all previously delinquent but not defaulted loans were marked current, driving this rate to zero during the pandemic. Meanwhile, student loan borrowers with either private or FFEL loans needed to request voluntary forbearance from their loan servicer. The rate of forbearance for private loans increased from 26 percent in February 2020 to 33 percent in May 2020 before steadily declining. The forbearance rate for FFEL borrowers increased from 26 percent in February 2020 to a peak of 36 percent in June 2020 before falling to levels on par with private loans.
Throughout the pandemic, forbearance kept Direct borrowers current, but it only provided a temporary reprieve for struggling FFEL borrowers.
Similar to Direct loans, a large number of FFEL loans that were previously past due were marked current during forbearance, which caused the delinquency rate to drop from 5% to Prior to the pandemic, 4 percent dropped to a low of 3. 1 percent in July 2020. Delinquency started to rise again in late 2020 because voluntary forbearance for FFEL loans usually only lasted a few months. However, another round of stimulus payments at the start of 2021 caused another slight decline in delinquency. Delinquency for FFEL borrowers began to increase in March 2021 and by the end of the year, it had returned to pre-pandemic levels. In contrast, private loan borrowers fared much better during the pandemic, with delinquency rates falling to a low of 3 during the course of the pandemic. 6 percent at the end of 2021.
The Evolution of Student Loan Balances during the Pandemic
We compare changes in balances during the pandemic (between April 2020 and December 2021 – blue bars) to changes in balances prior to the pandemic (between June 2018 and February 2020 – red bars) in order to better understand the evolution of borrowers’ loan balances during the pandemic. In order to concentrate on those who are no longer taking out new loans, we only include student loan borrowers who took out their last loan before October 2017.
Before the pandemic, borrowers for direct loans were almost evenly divided into two groups: those who were making loan payments on time (40%) and those whose balances were rising (43%). Although a small percentage of delinquent borrowers tend to have increasing balances, this is more often due to the availability of Income-Drive Repayment (IDR) plans, where borrowers make monthly payments that are often insufficient to cover accruing interest. Even though they make their payments on schedule, IDR borrowers in negative amortization may see their balances rise; in recent years, this has become more frequent. But because of administrative forbearance and the temporary 0% interest rate during the pandemic, the percentage of borrowers with growing balances fell to almost zero. Nine percent of the borrowers with growing balances before the pandemic made some progress, while 83 percent saw no change in their balance during the pandemic forbearance. In the meantime, direct loan borrowers who had decreasing balances prior to the pandemic were more likely to continue to do so during the pandemic, with 34% of them continuing to do so and 66% not doing so.
Most Direct borrowers made no payments during the pandemic forbearance
The balance evolution of borrowers with FFEL loans who did not receive automatic forbearance is shown in the following chart. Compared to Direct loan borrowers (40 percent), a larger portion of these borrowers (59 percent) had declining balances prior to the pandemic. Compared to Direct borrowers, FFEL borrowers are typically older, have better credit scores, and have less generous IDR plans—factors that result in them having growing balances less frequently—since the last FFEL loans were distributed in 2010. The majority of FFEL borrowers did not alter their payback practices during the pandemic. Nonetheless, a number of FFEL borrowers managed to quicken their repayment pace, leading to a one percentage point rise for those making the fastest payments. Concurrently, there was a 2 percentage point increase in the proportion of FFEL borrowers with growing balances. Since interest was still accruing, FFEL borrowers’ increased use of elective forbearance contributed to the growth in their balances. However, a small portion of these borrowers struggled and missed payments when they had been making them in the past.
During the pandemic, some FFEL borrowers had difficulty making their payments, while others accelerated their paydown.
The final chart below illustrates how, during the pandemic, private loan borrowers’ payback schedules changed. During the pandemic, these borrowers were more likely to accelerate their repayment rate. Private loan borrowers were more likely to make larger balance reductions than in the prior year and were less likely to have increasing balances, make no progress, or make little progress on their loans compared to the previous twenty months. The proportion of private loan recipients making at least a $2,000 repayment rose from 40% to 49%, a 9 percentage point increase. We showed in a previous post that multiple rounds of stimulus payments drove significant reductions in credit card debt during the first year of the pandemic; however, we do not find a similar stimulus-fueled paydown for Direct borrowers. This acceleration in paydown by private student loan borrowers and some FFEL borrowers was likely made possible by these payments.
Lessons from FFEL Borrowers
We think that when required payments resume in the future, the experience of the FFEL borrowers who were forced to exit forbearance in late 2020 will portend repayment challenges for Direct borrowers in the future. During the pandemic, borrowers with bank-held FFEL loans who did not qualify for automatic forbearance were more likely to experience payment difficulties. Forbearance allowed some FFEL borrowers to avoid delinquency, but soon after the forbearance period ended, delinquency rates rose. Moreover, delinquency among FFEL borrowers who had previously been forborne extended beyond their student loan debt. We discover that after coming out of forbearance, these borrowers had a 33 percent greater delinquency rate on their non-mortgage, non-student debt than the Direct borrowers who stayed in forbearance. Prior to the pandemic, FFEL borrowers made more progress toward repayment, had lower credit scores, and had smaller debt balances than Direct loan holders, despite the fact that borrowers will probably experience a stronger economy in the future. Therefore, we anticipate that when forbearance expires, Direct borrowers will likely see a significant increase in delinquencies for both student loans and other debt.
Policymakers have considered several proposals to soften the end of the forbearance program that has helped to smooth cashflow for most student borrowers during the pandemic recession. These proposals range from temporarily not reporting missed payments to credit bureaus to outright cancellation of federal student loans. Suspending the reporting of delinquencies will certainly prevent payment difficulties from appearing on a borrower’s credit report and allow borrowers to better ease into repayment, but these repayment issues will still exist under the surface. These concerns have motivated a debate on student loan cancellation which will be the topic of an upcoming post.
Cite this article as follows: Federal Reserve Bank of New York Liberty Street Economics, “Student Loan Repayment during the Pandemic Forbearance,” Jacob Goss, Daniel Mangrum, and Joelle Scally, March 22, 2022, https://libertystreeteconomics newyorkfed. org/student-loan-repayment-during-the-pandemic-forbearance.
Disclaimer: The opinions expressed in this post are the authors’ own and may not represent the views of the Federal Reserve System or the Federal Reserve Bank of New York. Any errors or omissions are the responsibility of the authors.
FAQ
Why is my student loan balance increasing?
Over time, interest may result in an increase in your student loan balance. Even though you’re making payments, a ballooning balance could occur if you’re not paying enough to cover the loan’s increasing interest each month. This frustrating cycle is called negative amortization. Interest accrues on student loans daily.
Why has student loan debt increased?
High education expenses and the need to compete in the job market are major contributors to student loan debt. The most prevalent type of debt associated with education is student loans, which are followed by credit cards and other credit Not finishing their degrees increases the likelihood of default for borrowers.
Why did my student loan rate go up?
When the federal funds rate fluctuates, borrowers with variable-rate student loans from private lenders may see a change in their interest rate. Higher borrowing costs will be incurred by college students who take out federal student loans after the Federal Reserve raises interest rates.
Why did my student loan limit increase?
As a student advances to a higher grade level, their maximum annual loan limit increases. If an undergraduate student is enrolled in a program (or the remaining portion of a program) that is shorter than an academic year, the loan limit must be prorated.
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