Student loan default could soar when student loan payments restart soon.
Here’s what you need to know.
Student Loans
A Federal Reserve Bank data analyst is sounding the alarm bell that student loan delinquencies could increase to pre-pandemic levels once federal student loan payments restart after May 1, 2022. “Serious delinquency rates for student debt could snap back from historic lows to their previous highs in which 10% or more of the debt was past due,” Lowell Ricketts wrote in a blog post last week.
Student loan borrowers need clarity on restart of student loan payments
Ricketts isn’t the only one issuing this warning. Sen. Elizabeth Warren (D-MA) and her congressional colleagues sent a letter to U.S. Secretary of Education Miguel Cardona expressing their concern that student loan borrowers don’t have necessary clarity about the return of student loan payments. Warren wants to ensure that “borrower harm is minimized during the transition” to student loan payments. Minimizing borrower harm starts with specificity from the Biden administration of when student loan payments will restart. (Where Biden stands on student loan relief). This is especially true as more than 12 million student loan borrowers have a new student loan servicer this year, which can increase confusion and uncertainty.
Student loan default may soar
Warren is concerned that student loan delinquency (not making a student loan payment for at least 90 days) and student loan default (not making a student loan payment for at least 270 days) may soar if student loan payments restart in May. (5 ways to get $0 student loan payments). When temporary student loan relief ends, more than 42.3 million student loan borrowers will restart federal student loan payments plus their regular interest rate. Student loan borrowers who default on their student loans will again be subjected to wage garnishment or other involuntary collection. Approximately 7.2 million borrowers have student loans that are in default. Warren and her colleagues write that 50% of federal student loan borrowers are at increased risk of student loan delinquency. This news also comes amid a new survey showing that 37% of student loan borrowers said they were “not at all confident” about their ability to make student loan payments when the student loan payment restart.
Will student loan payments restart in May?
For months, the restart date for federal student loan payments has been after May 1, 2022, when temporary student loan relief is scheduled to end. The White House and the U.S. Department of Education both have focused on the May 1 payment restart date. However, it’s possible that Biden may extend the student loan payment freeze beyond May. “The president is going to look at what we should do on student debt before the pause expires, or he’ll extend the pause,” White House Chief of Staff Ron Klain said last week on the podcast Pod Save America. Progressives in Congress are also continuing a campaign to pressure Biden to cancel student loans for most or all student loan borrowers. (Student loan cancellation reduced to $25,000). To date, Biden has focused on targeted student loan cancellation rather than wide-scale student loan cancellation. (Biden has cancelled $15 billion of student loans). However, Biden has called on Congress to cancel up to $10,000 for student loan borrowers.
With the scheduled end of student loan relief near, make sure you’re prepared. Know all your options for student loan repayment, including these:
- Student loan refinancing (lower interest rate + lower payment)
- Income-driven repayment (lower payment)
- Student loan forgiveness (federal student loans)