Fed Bank Warns of Impending Student Loan Danger

Some of the most interesting analysis on student loan trends is coming from one of the national Federal Reserve banks: Lowell R. Ricketts at the Federal Reserve Bank of St. Louis Institute for Economic Equity gives us a window into what’s happening right now, as student loan borrowers all too often scramble to make sense of their complex and confusing debt.

This article goes over some of the most important things to know about how student loan borrowers are doing as we all prepare for the end of the Biden debt pause program scheduled for October.

One of the most important assets in this piece provides a visual that we can digest in thinking about how average people are handling student debt: Ricketts includes a chart where we can see general debt delinquency levels, and that of specialized categories of debt levels from 2003 through 2021.

What we’re seeing, in part, is that student lending is a particular kind of debt with its own troubling characteristics and financial stress levels for borrowers. The line for student debt delinquency trends higher than some of the others. We can also see the effects of current events on what borrowers are facing.

Student Loan Debt: Transitions

Looking at the chart, you see that in 2003, serious delinquency on American student loan debt was around 6% in terms of past due amounts overall.

Then we saw that number rise to around 10% to 12% and stay there until Biden’s program artificially shrank those levels of emergency past due loan amounts back down to around 6%.

Will that number go back up? Most experts think so. The relief is going away, and according to many who struggle with negligent, and possibly fraudulent lenders, the situation has not gotten better in the meantime.

Looking at the fruits of this research, you can also contrast student loan debt to other debt categories, where again, only credit card debt has a higher rate of delinquency.

Mortgage and auto debt have much lower delinquency rates, as you can see. That speaks to the real burden that student loan debt represents, which is part of the reason the current presidential administration took steps to shield borrowers from the horrors of default.

Emerging Changes

What’s coming up? One big change that is impacting our collective debt is that the student loan relief program which originated during COVID is ending. COVID debt relief, in general, is going away, and that’s going to put more pressure on low-income borrowers. For example, eviction moratoriums are also a thing of the past, and in the interim, many did not manage to pay down their back rent.

At the same time, the Federal Reserve has raised interest rates a number of times, and now you have higher costs for mortgages and other loans. (You also have inflation, which doesn’t help.)

We see how some private student loans can carry interest of up to 15%, which is an enormous amount of financial stress for anybody who has that sort of loan without any deferment or forbearance programs after they graduate.

Another point to mention here is that a similar Fed group in Philadelphia (called the RADAR group) found specific challenges for minority families, specifically, for black families, under current conditions, where these borrowers tend to have higher balances and more reliance on student loan debt for higher education, according to some studies.

The interest rates that you have on your loans are going to matter over the lifetime of their repayment – a lot! For more on interest rates attached to debt, check out this resource from Bankrate.

Complicated Paperwork and Other Student Loan Challenges

One solution that many experts feel would benefit borrowers is to simplify the process.

“(Many) of the home-retention options available to borrowers with a mortgage in forbearance are intended to reduce the burden of payments along with requiring less onerous documentation of hardship,” Ricketts writes. “Even before the pandemic, student loans had a complex web of repayment plans for borrowers who couldn’t keep up with their payments. In the longer term, simplifying the student loan repayment options may help borrowers and loan servicers alike.”

For example, in some of the above forbearance programs, certain categories of loans are eligible, while others are not. In general, people count themselves lucky if they’re holding federal student loans rather than private loans. But for a particular forgiveness program, many borrowers eventually find themselves disappointed: if you have, for instance, an FFEL/ Perkins loans written before a certain date, are you eligible? And what about disability status? Borrowers who were counting on lenders to help them through transitions, or even just play fair, may find themselves with unpleasant and unanticipated obstacles to paying down their debt! (Just read some of our stories!)

In the end, we’re going to have to wrestle with the massive amount of student loan debt that is out there, and some pretty substandard practices by lenders who want to deny relief options. Even though the pause program is set to expire, there are new income-based repayment plans available in many cases, so make sure to follow this blog, and check out the Consumer Finance Protection Bureau, and get the resources you need to survive financially as a student loan borrower!