The moratorium on federal student loan payments has been a boon for many borrowers, who have been able to save to buy a home, pay off their debt significantly, or at least catch up on other bills. But new research has found that borrowers who were already struggling financially before the pandemic may emerge from a repayment hiatus that ended in September more than three years later, but may be in worse financial shape.

Professor Heather Tookes said struggling borrowers, who may have initially benefited from a three-plus-year pause in student loan payments, would have to start making repayments again while their various debts were even larger It was worse than before the epidemic. Finance from Yale University.

Use of credit bureau dataTux and two other researchers compared distressed federal borrowers (defined as borrowers who defaulted on their student loans in the 24 months before the pandemic) with borrowers with private loans (who did not benefit from payment suspensions). borrowers) performance since the outbreak. Pandemic.

At first, federal borrowers did well: Six months after the moratorium began, their credit scores jumped by an average of 70 points. But many borrowers use their improved scores, along with some extra cash each month, to take on more debt in the form of auto loans or credit card charges. In fact, the average credit card debt increases by more than 12% compared to private loan borrowers.

The study then found that vulnerable borrowers not only had more debt, but also delinquency rates on credit card and auto debt. Didn’t the bucket of debt increase for this group? mortgage debt. The study doesn’t deduce why, but mortgage lenders may have a more holistic view of finances than auto lenders.

On top of that, the researchers estimate that vulnerable federal borrowers now have 12.1 percent more student loan debt than those who didn’t defer their loan payments. They fear financial hardship for these borrowers will worsen when repayments resume in October.

Tux’s research again looked at borrowers who were already struggling. For many, pausing payments is time to achieve other financial goals or simply keep up with the rising cost of living. Some borrowers have taken advantage of 0% interest to pay off their debts completely.

Tux told Yale Insight that she is not yet sure what the exact takeaway is. For example, new auto loan debt is largely driven by new loans — vulnerable borrowers who may eventually be able to buy the vehicles they need. Once payments do recover, researchers will continue to track borrowers to see if what other analysts have called the “student loan cliff” will materialize.

“There was a lot of uncertainty at the beginning (of the pandemic),” Tux said. “We didn’t know what was going on, and people weren’t working. The better question is whether extending the deferment would help, that is, all students with federal holdings Borrowers of the loan are automatically enrolled in the scheme for more than three years.”

Those struggling to afford federal payments have several options.They can choose to participate in income-driven repayment plans such as New SAVE program, which can reduce monthly payments to as low as $0. Borrowers can now enroll in the program.

And, as a last resort, they can defer student loan payments for a while. Before resuming payments, the Biden administration announced a one-year grace period for federal borrowers, from Oct. 1, 2023, to Sept. 30, 2024. During this time, late payments will not be reported to the credit bureaus and borrowers will not be considered delinquent if they do not pay.Interest will still accrue on the balance, but not capitalizedwhich means it will not be added to the body.

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