Credit Crunch Looms as Student Loan Delinquencies Return
As concerns of a US economic slowdown mount, we hear that millions of Americans are facing the possibility of student loan delinquency. This could soon affect their credit scores as a result of the Biden administration’s ending moratorium on credit reporting for missed payments. According to a Government Accountability Office (GAO) report, around 10 million borrowers were behind on their repayments by January 2023, with two-thirds of them at least three months overdue, typically classified as severely delinquent.
Until now, borrowers have been shielded from credit score damage due to the Biden administration’s one-year freeze, which began when loan repayments resumed post-pandemic. However, this protection ends in October, and a significant number of student loan holders are expected to fall into delinquency.
The slowdown in student loan repayments over the past year suggests the problem could be severe. Data shows monthly transfers from the Education Department to the Treasury, which reflect repayment levels, have fallen from around USD 7bn to just USD 4.bn – the lowest since 2014, excluding the pandemic freeze period.
Credit reporting agencies are keeping a close eye on the developments, as a rise in delinquencies could limit access to credit for millions of households. Age-wise, Americans in their 30s and 40s are expected to be most affected, as they hold the largest share of the nation’s USD 1.6tn student loan debt.
While President Biden has forgiven billions in student debt for millions of Americans, his administration's biggest debt relief efforts have been consistently stymied by Republican legal challenges, including the blocking of his $10,000 forgiveness plan by the Supreme Court. The Biden administration's most recent initiative to automatically cancel debt for 30 million borrowers was blocked by a federal judge in Georgia before it could be implemented, as a group of GOP-led states filed a lawsuit challenging the plan. A hearing on this lawsuit is set for mid-September, but the judge has indicated the Republican challenge appears likely to succeed.
The end of the student loan repayment freeze threatens a credit crunch for millions of Americans as the job market cools and interest rates remain high, squeezing household budgets. The prospect of widespread damage to consumers' credit profiles risks compounding the financial pressures already facing many American households in the months ahead.
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