Student debt defaults set for a comeback

The challenges student debt-saddled Americans face to keep up with payments are set to worsen next month as the upcoming expiration of crucial protections threaten to push them closer to the edge of delinquency.

A recent report by the Government Accountability Office found about 10 million borrowers were behind on payments as of January, including two-thirds who were overdue by more than three months – a signal of potential debt default. 

As a report by Bloomberg noted, student debt currently doesn't count against borrowers' credit scores thanks to a Biden administration moratorium temporarily halting missed payments from reflecting on their reports. But that one-year reprieve is set to end next month, leading to concerns that a large swath of student loan holders will fall into delinquency.

Government data show that student loan repayments have declined since the pandemic. While payments resumed last year, transfers from the Department of Education to the Treasury have dropped from $7 billion last summer to $4.1 billion last month. This marks the lowest reading since 2014, excluding the pandemic-related freeze.

The pressure of student debt was also clear to see in a survey conducted by the Harris Poll on behalf of Bright Horizons. It found that among US workers with student loan debt, two-thirds (68 percent) felt their education wasn't worth it, and an even larger 80 percent majority said it has been a huge burden. Another 43 percent reported student debt had a negative impact on their mental health, and 41 percent said it had affected their future plans.

Many borrowers have turned to government programs, including eight million who've enrolled in the Biden Administration's SAVE plan, which adjusts payments based on household size and earnings. However, legal challenges have complicated the implementation of these programs, including court rulings that put a freeze on the White House's SAVE initiative.

Biden's various student debt forgiveness efforts have led to roughly $168.5 billion being forgiven to date, and data from the Federal Reserve of New York suggest the decades-long advance in US student debt has stopped at $1.6 trillion since late 2020. But all told, the trend of student debt delinquencies and defaults typically outpacing other types of debt, a pattern that showed in pre-pandemic data, looks set for a comeback.