The pandemic-era student debt payment freeze has “significantly” improved the credit scores of Americans who have borrowed money to pay for college, the Federal Reserve Bank of New York has said.
About 30 million people saw their risk profile improve, with the biggest gains going to borrowers who were delinquent before the pandemic, New York Fed economists said in a blog post on Tuesday.
They summarized the findings of an annual report on US student debt, which exceeds $1.7 trillion in total.
The moratorium on repayments and interest charges for federal student loans has been in place since the onset of the pandemic in early 2020.
It is currently set to expire on August 31, although President Joe Biden’s administration is considering another extension, as well as partial debt forgiveness for some borrowers.
Here are some key points from the New York Fed report.
Better credit ratings
The share of student loan balances held by subprime borrowers fell to 26% in 2021 from 36% in 2019.
This is primarily because loans owed to the federal government that were in default prior to the pandemic were marked as current under the forbearance policy, putting millions of households back on a stronger financial footing.
“The end of forbearance will have impacts on credit scores, borrowing and household cash flow over the coming year for the 38 million federal borrowers who benefited from the pause,” they said. writes the New York Fed researchers.
“Some borrowers will go into delinquency or default.”
With repayments on hold, about two-thirds of student debt holders had growing or stable balances at the end of 2021, up from just 48% in 2019.
That’s an increase of about 3.2 million borrowers.
There has also been a change in the typical size of debts, with larger loans accounting for a larger share of the total.
Meanwhile, 5.4 million people who were recorded as having unpaid student debt at the end of 2019 owed nothing at the end of 2021.
DC Debt Leader
On average, student borrowers in and around the nation’s capital owed the most at the end of 2021.
Washington DC tops the list, with an average debt of $53,769, while Maryland ranks second and Virginia fifth.
“Of the ten states (not including DC) with the highest median balance, seven are in the southern census region (Georgia, Maryland, Virginia, North Carolina, South Carolina, Alabama, and Tennessee),” the report says. report.
Once the forbearance period ends, loan amounts should increase and delinquency rates in southern states should perform worse.