NY Fed Warns of Debt Crunch Coming If Biden’s Student-Loan Plan Fails

Student borrowers in the US are struggling to keep up with other kinds of debt even while college payments are frozen, and a surge in delinquencies is likely if the government’s debt-relief plan fails, according to a new study.

(Bloomberg) — Student borrowers in the US are struggling to keep up with other kinds of debt even while college payments are frozen, and a surge in delinquencies is likely if the government’s debt-relief plan fails, according to a new study.

Among borrowers who’d be eligible for President Joe Biden’s forgiveness plan, which is mired in a Supreme Court challenge, there’s been a “stark increase” in delinquencies on credit cards and auto loans during recent quarters, economists at the Federal Reserve Bank of New York wrote in a paper. 

“These missed payments suggest that some federal student loan borrowers are having trouble meeting their monthly debt obligations even though student loan payments are not required,” the New York Fed analysts wrote. “We expect these delinquency patterns to worsen if federal student loan payments resume without relief.” 

In that case, there’ll also likely be an increase in defaults and delinquencies on the student loans themselves, which could “potentially surpass pre-pandemic levels,” according to the New York Fed. About 15% of student borrowers were behind on their debt before the Covid crisis hit in March 2020, and the government announced a moratorium on repayments.

That freeze has now been extended eight times — most recently by the Biden administration, which said payments won’t resume until a proposal to write off as much as $20,000 per borrower has been reviewed by the Supreme Court. The court will hear arguments next month, and a ruling is likely by early summer. Biden says debt payments will restart within two months of that.  

Who Gets Help?

Should the Biden plan get the green light, it will deliver the most benefits to younger borrowers and those with lower incomes and credit scores, according to the New York Fed economists. 

Their paper addresses what’s been a key question in the student-loan debate: whether debt forgiveness is a policy that favors the wealthy.

Critics of the Biden plan have charged that it helps college-educated Americans who already have stronger finances and better job prospects. The administration says that writedowns will skew toward lower-income borrowers, a claim that’s broadly supported by the New York Fed’s study.

Some $441 billion in student debt, about 30% of the total owed to the federal government, is eligible for forgiveness.

If that happens, the pool of remaining loans will shift toward older borrowers and those with higher incomes, who typically owe larger amounts, the New York Fed said. 

Since many people who borrowed smaller sums would see their entire debts written off, the average loan balance would rise to $48,100 from about $40,700 now. 

Even if it wins Supreme Court approval, the Biden administration’s one-time forgiveness plan won’t fix the long-term problem of rising higher-education costs, the New York Fed economists wrote. “Absent direct policies to address this growing burden, taxpayers may be again called to for relief in the future.”

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