Student-Loan Defaults Risk Snapping Back to Highs, Fed Analysis Shows

(Bloomberg) -- Americans with student loans are about to get a stark wake-up call on their borrowings as government relief programs phase out, according to a blog post by the Federal Reserve Bank of St. Louis.

While federal stimulus programs have kept many low-to-moderate income households afloat during the pandemic, most student-loan payments are scheduled to resume after May 1. That will usher in a transition period of consumer-debt relief in which defaults are poised to rise, the regional Fed bank said.

“Serious delinquency rates for student debt could snap back from historic lows to their previous highs in which 10% or more of the debt was past due,” Lowell Ricketts, a data scientist for the Institute for Economic Equity at the St. Louis Fed, said in the post.

Most borrowers have been financially stronger during the pandemic thanks to government-relief programs, the New York Fed said in a separate report Tuesday. Median credit scores were higher for all income groups as of the third quarter of 2021 compared with before the pandemic, it said in its report, based on data derived from Equifax. Bankruptcies also declined substantially.

However, student-loan default rates remain more than three times higher among borrowers in low- and moderate-income areas than their wealthier counterparts. Low-wage workers lost jobs at five times the rate of middle-wage workers in 2020, while high-wage employment increased, the report said.

Not only are forbearance programs masking these hardships, but inflation is also eating into purchasing power among lower-wage earners, the New York Fed said.

Race is also a factor. The St. Louis Fed report found that long before the pandemic, Black families disproportionately relied on financing to go to college -- and when Black students take out loans, “their balances, on average, are significantly higher.”

Racial Discrepancy

“Among the class of 2016, the average student-loan balance was $42,746 one year following graduation for Black students compared with $34,622 for white students, according to data from the National Center for Economic Statistics,” Ricketts wrote. “Therefore, the resumption of student-loan repayments will raise the burden on Black students' budgets more so than Whites.”

While the “sizable fiscal transfers served as a lifeline for many Americans” the improvements on credit reports achieved by the relief may disguise underlying vulnerabilities when all support programs have ended, the blog post showed. The student-loan pause is scheduled to end on May 1 -- so these vulnerabilities may become more apparent for millions soon.