Millions of students in the U.S. are finding themselves in default of their student loans after COVID-19. About 9.7 million student loan borrowers became delinquent on their bills after the COVID-era payment pause expired, according to a new estimate by the Federal Reserve Bank of New York.
"According to these numbers, it is reasonable to expect student loan delinquency to surpass pre-pandemic levels when new delinquencies hit credit reports," the Fed's report says.
What was the COVID-era student loan pause?
The COVID-era student loan pause refers to a series of temporary suspensions of federal student loan payments and interest accrual, which began in March 2020 as part of the U.S. government's response to the economic impact of the COVID-19 pandemic. The pause was initially enacted under the CARES Act, offering relief to millions of borrowers struggling with financial instability due to the pandemic.
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During this period, federal student loan borrowers were not required to make payments, and interest rates were set to 0%, meaning loans didn't accumulate interest. The pause was extended several times, with the final extension pushing the end of the pause to August 2023.
This measure helped borrowers manage financial strain during the pandemic, offering a temporary reprieve until the economy stabilized. However, loan payments resumed in September 2023 after the pause ended.
Additionally, the shutdown of the Department of Education is expected to create further uncertainty, especially for students with disabilities, as special education oversight has been transferred to the Department of Health and Human Services.
These changes highlight the urgency of addressing the challenges faced by borrowers. Shutting down the federal education department may also significantly disrupt the management of federal student loans, including the handling of defaulters.
Borrowers in default could face delays in loan servicing, collections, and repayment plans. Without the department's oversight, the systems for loan forgiveness, income-driven repayment plans, and borrower protections might break down.
Defaulters could see a rise in interest accumulation, penalties, and more aggressive collection efforts. Additionally, the absence of proper administration could lead to confusion about available options for relief, like rehabilitation programs, leaving borrowers without necessary support to resolve their defaults.