Student loans repayments have resumed, showing a high number of borrowers are severely late with their payments.
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Over 4 million student loan borrowers, roughly one in five, are grappling with severe delinquency, according to recent findings by TransUnion. This striking number signifies a substantial portion of Americans are either unable to make loan payments, unaware of their due dates, or actively choosing not to pay.
This revelation comes as the Department of Education gears up to resume collecting defaulted federal student loans from Monday onwards, following a Jahre-long pandemic-induced pause.
TransUnion's analysis, published in February, reveals that a staggering 20.5% of student loan borrowers with active payments are "seriously delinquent," defined as 90 days or more past due. This figure represents a sharp increase from pre-pandemic levels, when only 11.5% were seriously delinquent. The previous record was documented in September 2012, when 15.4% of borrowers fell into this category.
However, TransUnion warns that its reported figure of one in five student loan borrowers seriously delinquent may actually underestimate the issue. Some borrowers may appear to be 90 days or more past due but have yet to be reported as seriously delinquent, possibly because they are exploring repayment programs or other options.
It's important to note that the Covid-era protection on student loan payments ended in September 2023, offering borrowers temporary relief from the negative impacts of missed payments until October 2024.
Michele Raneri, vice president and head of US research and consulting at TransUnion, explains that some borrowers might be "overstretched" and face a precarious financial situation. Indeed, 50.8% of subprime federal borrowers with past-due payments fall into the seriously delinquent category.
Raneri notes that while some borrowers may be unable to pay, others might be unaware of the resumption of payments or unsure about the repayment process. Some may simply prefer not to pay for various reasons.
Regardless of the underlying causes, falling behind on student loan payments can result in financial consequences. According to research from the Federal Reserve Bank of New York, student loan delinquencies have caused a steep drop in credit scores. Delinquencies have stripped an average of 87 points from subprime borrowers' scores and 171 points from those with super prime, or excellent, scores. TransUnion found an average drop of 63 points for federal student loan borrowers who are delinquent, though still significant.
"This will likely make it more challenging to secure a mortgage and, if successful, could lead to less favorable interest rates than previously experienced," Raneri explains. In an era of already high interest rates, such a situation will only increase borrowing costs for those struggling with student loan debt payments.
TransUnion's data suggests that approximately 41.9 million people hold student loan debt, with the vast majority (39.7 million) owing federal student loans. Roughly 20 million of these federal loan holders have had payments deferred or are in forbearance. This leaves approximately 19.7 million still responsible for their federal student loan debt over the past three months.
Borrowers with weaker credit scores are more likely to find themselves behind on their federal student loan debt, according to TransUnion's findings. While 50.8% of subprime borrowers fall into the seriously delinquent category, just 0.9% of those with super prime scores are delinquent.
Tyler Wickord, a 29-year-old resident of Southern California, wrestles with repaying his $12,000 in student loan debt. "It feels like I'm drowning," Wickord admits. "Knowing I have student loan debt to pay, along with rent, credit card debt, and other expenses, is a nerve-wracking feeling, as if the life preserver will never reach me while I'm in the ocean."
Wickord seeks to reduce his student loan debt despite currently owing nothing due to an income-driven repayment plan. To make ends meet in the high-rent district of San Diego County, he has taken on a second job. "I voluntarily took on student debt, but the amount accumulates more than expected," Wickord laments. "There are times it feels like predatory lending with lenders willing to offer big loans to 18 or 19-year-olds, loans that take decades to repay."
CNN's Alicia Wallace contributed to this report.
Enrichment Data:- Overall: A significant number of Americans are finding it challenging to meet their federal student loan payments, impacted by the end of pandemic relief measures, high debt levels, and economic instability.- Reasons for Struggle: 1. End of Pandemic-Era Relief: The cessation of student loan payment relief has left many borrowers exposed to wage garnishments, financial penalties, and potential credit damage. 2. High Debt Levels: The burdensome amount of federal student debt (over $1.6 trillion) often leads to financial strain for those unable to manage their obligations effectively. 3. Economic Conditions: Economic downturns can lead to reduced employment opportunities and lower incomes, making it difficult for borrowers to keep up with loan repayments.- Impact on Credit Scores: 1. Late Payments: The resumption of loan servicers reporting late payments to credit bureaus has led to drops in borrowers' credit scores. 2. Default Consequences: Borrowers in default may face significant credit damage, including lowered credit scores due to the reporting of delinquencies and the implementation of collection actions. 3. Collection Actions: The reinstatement of loan collections could result in wage garnishment, withheld tax refunds, and other punitive financial measures, further harming borrowers' financial stability and creditworthiness.- Current Statistics: Approximately 5 million borrowers are in default, while another 7 million are delinquent, highlighting the breadth of the issue. This situation underscores the challenges these borrowers face and the broader impact on the financial system.
- The findings by TransUnion in 2023 revealed that about 20.5% of Americans with active student loan payments are "seriously delinquent," a significant increase from pre-pandemic figures.
- The high number of seriously delinquent student loan borrowers may be underestimated as some borrowers haven't been reported yet, possibly because they're exploring repayment programs or other options.
- The cessation of the pandemic-induced pause on collecting defaulted federal student loans in 2023 could have financial consequences for borrowers, potentially leading to reduced credit scores and increased borrowing costs.
- Borrowers with weaker credit scores are more likely to be struggling with their federal student loan debt, as seen in the case of Tyler Wickord, a 29-year-old Californian, who admitted to feeling overwhelmed by his $12,000 student loan debt.
