With payments for borrowers with federal student loans set to resume in May after a more than two-year pause, defaults on those loans could spike, according to a new analysis.
The Federal Reserve Bank of St. Louis in a memo released this week projected default rates could return to their pre-pandemic levels once payments restart.
“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,” wrote Lowell Ricketts, a data scientist for the Institute for Economic Equity at the Federal Reserve Bank of St. Louis.
Historically, borrowers of color and those from disadvantaged backgrounds had to rely on taking out student loans to finance their postsecondary education more often than their peers.
Specifically, the memo notes that Black families have had to disproportionately rely on loans to pursue an education. “Therefore, the resumption of student loan repayments will raise the burden on Black students’ budgets more so than whites,” the memo adds.
The memo goes on to cite data from the National Center for Economic Statistics that shows the average student loan balance was $42,746 one year following graduation for Black students in the 2016 class, compared with $34,622 for white students.
Taken together, this shows that not all will navigate the resumption of payments the same way.
Notably, the memo points to a complex student loan system where the onus is put on the borrower to reach out to their student loan servicer to ensure they are on the best repayment plan as an obstacle that could further impact borrowers come May.
“In the longer term, simplifying the student loan repayment options may help borrowers and loan servicers alike,” the memo notes.
Publication Date: 3/3/2022