Panelists Caroline Downey and Cage Sawyer recently discussed the troubling rise in student loan delinquencies, questioning whether the price tag for current and future university students is justified.
A recent report from the New York Federal Reserve reveals that while credit card debt among Americans has decreased, student loan delinquencies have surged, negatively impacting credit scores.
The Microeconomic Data Center of the New York Fed published its quarterly findings, which highlighted an overall increase in household debt by $167 billion, alongside a $29 billion drop in credit card debt. This decrease in credit card debt follows a seasonal trend as consumers settle their holiday expenditures from the previous year.
Yet, starkly, the report also revealed that student loan delinquency rates have jumped from less than 1% to nearly 8% since the suspension of late loan reporting ended.
Initially, during the Covid-19 pandemic, student loan payments were paused in early September 2020 and remained so until September 2023, which helped keep delinquency rates below 1%. As payments resumed, policymakers allowed a year-long grace period to prevent borrowers from being reported for missed payments, which is set to end in October 2024. After that, late payments will impact credit reports starting in the first quarter of 2025.
Many new delinquents, over half, already have subprime credit scores. Interestingly, about 2.4 million borrowers who fell behind this year had scores above 620, meaning they could still qualify for cars, mortgages, and credit cards before their delinquency became official.
Among the newly delinquent population, there are 3.2 million borrowers with scores below 620, comprising 56.6% of the total, and these individuals experienced an average credit score drop of 74 points.
As for credit scores, 2 million borrowers falling within the 620-719 score range accounted for 35.9% of new delinquencies, facing a drop in scores averaging 140 points. Meanwhile, about 400,000 borrowers with scores above 720 also fell into delinquency, representing 7.5% of this group, with their scores plummeting by an average of 177 points.
Overall, more than 2.2 million student loan borrowers entered delinquency, witnessing their credit scores fall by over 100 points, and over a million of those experienced drops of at least 150 points.
The report also noted that seven states show particularly high conditional delinquency rates, notably Mississippi (44.6%) and Alabama (34.1%), among others.
Come the end of the first quarter, over 20 million federal student loan borrowers had not made any repayments, with five million reporting zero payments monthly.
According to the New York Fed, after five years of repayment suspension, student loan delinquency has reverted to a pre-pandemic state, with over 10% of the balance returning to around 6 million borrowers now in default or previously defaulted.
The collection of overdue loans resumed in May and encompasses actions like garnishing wages and tax returns. The Fed also emphasized that millions of borrowers are facing serious declines in their credit status, which could lead to higher borrowing costs and limited access to credit options like mortgages and car loans, and they will continue to watch if these repayment issues also affect other consumer credit categories.
