The lifting of the pause on student loan payments could result in a tidal wave of defaults as borrowers struggle to make payments that have been waived for more than three years.
A new report from the Consumer Financial Protection Bureau suggested that as many as 20% of borrowers, nearly 6 million people, carry risk factors that could lead them to default on their loans when payments resume this fall. The Department of Education has announced that interest accumulation will begin in September, and payments will be due beginning in October.
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Student loan payments and interest accumulation have been paused since March 2020 due to the coronavirus pandemic. The Biden administration has tried to enact a loan cancellation plan that would see borrowers making less than $125,000 have up to $20,000 in federal loans forgiven.
The plan has been tied up in court challenges since its announcement last year, but a Supreme Court ruling on the case's legality is expected before the end of June. Education Secretary Miguel Cardona has said the cancellation plan is necessary to alleviate the risk that borrowers will default when payments resume.
The CFPB report identified a number of issues that could contribute to defaults, including that 2.5 million borrowers have struggled to make payments on other obligations, such as credit card bills and auto loans. The report said the number of delinquent payments has increased by 200,000 since September 2022 alone.
Perhaps contributing to the delinquent loans, the pause has reportedly prompted a number of borrowers to take on additional debts, according to a recent working paper from the National Bureau of Economic Research. The paper said borrowers with paused payments took on an average of $1,800 in other forms of debt and an average of $1,500 in additional student loan debt.
Beth Akers, an expert in higher education economics, told the Washington Examiner that while she expects a number of borrowers to have a difficult time paying back their loans, she isn't "generally worried" that it'll be a significant problem.
"The unemployment rate is at a historic low, which means that people who want jobs can generally find them," Akers said. "And borrowers who can't afford to make payments due to low earnings are still eligible for the safety net programs that existed before the pause took effect. Those programs ensure that payments are reduced or eliminated, and loans that remain unaffordable in the long run are forgiven."
Akers said the increase in debt taken on by borrowers during the pause could make it more difficult for some borrowers to make their monthly payments, but she added this was due to financial decisions made by borrowers. She also noted that defaults on federal student loans would not have a great impact on the economy.
"Defaults on federal student loans don't affect the economy in the same way as borrowers defaulting on privately held debts, as seen during the mortgage crisis in '07," she said. "That's because the debt is to taxpayers and isn't affecting the balance sheets of private financial institutions that need borrowers to repay in order to remain solvent."
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A big concern Akers sees with the resumption of payments is the possibility of a "repayment strike" that sees a number of borrowers organize and refuse to make payments when the pause ends and thereby "really shoot them[selves] in the foot."
"Borrowers who don't make payments will have their loans go into collections, and they will suffer from having their credit score diminished," she said. "Regardless of whether a borrower wants to pay back their debt or thinks student debt should be canceled, the smart thing to do is to repay your student debt."