Loan and Behold
The end of pandemic-era student loan payment pauses has triggered financial difficulties for millions of Americans, with implications not only for individual borrowers but also for the broader US economy.
During the pandemic, federal student loan payments were temporarily suspended, offering borrowers financial breathing room. Many redirected those funds towards everyday expenses or discretionary spending. However, the resumption of payments has forced a sharp financial adjustment, as households must now divert income back to servicing debt—placing fresh strain on monthly budgets.
The scale of the challenge is already evident. In the first quarter of this year alone, approximately 5.6 million borrowers were newly marked as delinquent on their loans. These delinquencies come with serious consequences: near-prime borrowers have seen their credit scores drop by an average of 140 points; for prime borrowers, the average drop is 177 points.
A key factor compounding the issue is borrower expectation. Many had assumed that large-scale debt forgiveness proposals, especially those under the Biden administration, would succeed. When those efforts stalled, it left some borrowers unprepared for repayment, contributing to the rise in delinquencies.
The impact is uneven. Borrowers who attended two-year colleges, for-profit institutions, or failed to complete their studies are most likely to fall behind. Many in this group already held subprime credit and now face aggressive collection measures, including wage garnishment, tax refund seizure, and reductions in federal benefits.
Economically, the consequences extend beyond individual hardship. Analysts at Morgan Stanley estimate that resumed repayments will withdraw between $1–3 billion from household budgets each month, potentially reducing US GDP in 2025 by around 0.1%. While minor, this contraction could become more significant, alongside other headwinds such as tariff-induced price hikes, high interest rates and ongoing inflation concerns.
Income-driven repayment plans like SAVE may offer some relief, but they are unlikely to prevent widespread credit deterioration if delinquency trends persist. Much of today’s crunch can be traced back to the 2005 Bankruptcy Reform Act, which made student debt effectively non-dischargeable. This enabled predatory lending and poor-value programmes to flourish, leaving many with burdensome debt.
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