Low-Income Borrowers More Likely to Fall Behind on Student Loans Amid Pandemic, Report Finds

By Owen Daugherty, NASFAA Staff Reporter

The ongoing pandemic has had an outsized impact on low- and moderate-income student loan borrowers, with twice as many borrowers from that group falling behind on payments compared to their middle- and higher-income counterparts, a new national survey found.

Notably, the report from researchers at the Social Policy Institute at Washington University in St. Louis found that borrowers’ student loan payments were one of the first financial expenditures impacted by the pandemic and were greatly affected by job or income loss.

The proportion of borrowers who said their households were behind on student loan payments as a result of the pandemic was more than three times as large among those who lost their job or income due to the novel coronavirus when compared with those who did not, according to the report.

Most importantly, the report points out that these findings, based on survey results of more than 5,500 respondents from all 50 states conducted between April 27 and May 12, came after the Coronavirus Aid, Relief and Economic Security (CARES) Act was passed, which paused all payments on federally-held student loans until September 30, with zero interest accumulating for that period of time.

The report found that nearly two-thirds of borrowers who said they fell behind on their student loans as a result of the pandemic did so despite being able to take advantage of the payment suspension, and 27% who fell behind did not receive the forbearance at all.

While the authors note more research is needed to accurately define what it means for borrowers to “fall behind” on their loans, a telling statistic was found in the survey sample.

Less than 30% of low- and moderate-income borrowers experienced a decrease in their student loan balance in the three months prior to responding to the survey, while 48% of high- and middle-income experienced a decrease.

“Thus, the perception of being behind—when viewed in relative terms—may be quite accurate,” the report states. “Even though many [low- and moderate-income] households are not required to make any payments at this time, by not making payments, they are also not moving closer to paying off their loans and enjoying the financial freedom and well-being that come with it.”

In contrast, high- and middle-income were able to get ahead on their payments while interest and payments were paused.

“Thus, not moving closer to paying off their loans may ultimately mean falling further behind,” the report notes.

While it is difficult to deduce what led to these differences between the two groups of borrowers in the three months before filling out the survey, the authors contend that the higher-income households likely made optional payments on their student loans after the CARES Act was in place.

Additionally, higher-income borrowers could have used the stimulus payments allocated under the CARES Act to put toward paying off their student loans, as opposed to lower-income borrowers who were much more likely to use the money for things like food, rent, and more pressing bills, the report found.

As for the overall impact borrowers feel when they report “being behind” on their student loans, the report used The Financial Well-Being (FWB) scale, a term developed by the Consumer Financial Protection Bureau (CFPB) that measures “the state where a person has control over day-to-day and month-to-month finances; has the capacity to absorb a financial shock; is on track to meet their financial goals; and has the financial freedom to make the choices that allows them to enjoy life.”

Notably, the report found borrowers who fell behind on their payments due to the pandemic had FWB scores that were significantly lower than individuals whose households were not behind on their student loan payments.

“The inability to make progress on paying down student loans may further veer households off track for meeting their financial goals and enjoying the financial freedom that comes with being free of student debt,” the report states.

The authors acknowledge that the CARES Act forbearance period is helpful in the short term for borrowers, but note that in the long term, it could simply extend the payoff period, particularly for low-income borrowers.

The report suggests Congress should adopt many of the core tenets of the House Democrats’ Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, such as extending the temporary loan relief through September 2021 and allowing for the cancellation of up to $10,000 of both federal and private student loans. Additionally, the authors suggest Congress extend similar relief in the CARES Act for federal loan borrowers to borrowers with private student loans.


Publication Date: 8/6/2020

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