Resurgence of Federal Student Loan Repayments Creates Challenges for both Consumers and Lenders

AFTER MORE THAN THREE YEARS OF AN INTEREST-FREE PAYMENT PAUSE ON U.S. FEDERAL STUDENT LOANS, MILLIONS OF AMERICANS WILL SOON BE REQUIRED TO BEGIN MAKING MONTHLY PAYMENTS. As a result, there are growing concerns that many borrowers may have challenges with adding this obligation back in as part of their overall finances – creating conflicts with their ability to meet other consumer credit obligations, such as auto loans and bank cards. 

"Many consumers who took out federal student loans haven’t had to make those payments, so they were able to distribute that payment obligation and money elsewhere,” said Tom Aliff, Risk Advisor Leader for Equifax. “With those loans now restarting, coupled with inflationary costs across a number of goods and services, there will likely be challenges to consumer cash flow and impact to credit status if those repayment obligations are not met.”

However, when student loan payments begin in October 2023, delinquency reporting will not begin until the fourth quarter of 2024 – creating uncertainty around what the impact of the federal student loan pause will be, for both consumers and lenders.

“Restarting student debt payments has many borrowers concerned about being able to resume those payments,” said Aliff. “In fact, borrowers increased their debts by the end of 2022 and it’s estimated that borrowers who benefitted from forbearance have taken on an additional $1,800 in non-student loans, such as mortgage and auto loan debt, during the pause.”

For more on student loan repayments and consumer credit trends, watch the latest Market Pulse webinar or download the consumer credit trends report here.