Ready, get set, nope: Student debt borrowers and servicers just aren’t ready for the end of forbearance

The forbearance period on student loans is coming to an end and 46% of borrowers report they are not ready to resume payments. This state of unreadiness may be motivated by the debt borrowers are currently in, with those who were delinquent on their student loans before the pandemic, experiencing a 81% increase in their credit card debts and 94% increase in personal loans, according to a recent survey results by Credit Karma. 

Millennials seem to be worse off than Gen X, who have experienced relatively lower amounts of increases in personal loans and credit card debt, despite having higher overall debt. This may be because of the increasing participation of Millennials in areas like mortgages. Consumers aged between 25 to 41 (Millennials) accounted for 54% of all home purchase applications in 2022, continuing a trend that began in 2016 when the age cohort took over Gen X market share. 

Data Peculiarities: Credit Karma’s data shows that while those who are delinquent on their student loans have experienced higher increases in debt, they still have less overall debt than those who make payments on time. This is largely due to the credit segment that delinquent borrowers fall into. 

“84% of members who were delinquent on their student loans prior to the pandemic have a credit score below 600, compared to 41% of members who were current on their student loans at the onset of the pandemic. In general, consumers with credit scores below 600 have less access to credit, which makes it harder for them to rack up balances across multiple loan products. People with credit scores between 600 and 719, which makes up a large portion of the "current" cohort of members, have greater access to credit and tend to carry higher balances because they often have higher credit limits,” said a Credit Karma analyst. 

The impact of the failed Student Debt Forgiveness program

Almost 26 million people applied for student debt forgiveness, of which 16 million were already approved when the Supreme Court canceled the program. Currently, the Biden administration is working on a new student debt relief program, and recently it also canceled federal student loan debt for more than 1,200 borrowers who attended the University of Phoenix, because the administration claims the for-profit school misled students about job prospects. Similarly, the Department of Education canceled $72 million of federal student debt for borrowers from Ashford University in California. 

Collectively, the administration has forgiven over $117 billion of the nearly $1.7 trillion in outstanding federal student loan debt since 2021.

Student loans servicers are not prepared either

After receiving reports that student debt servicers don't have the contact of information of hundreds of thousands of borrowers, lawmakers have sent out letters to four of the biggest federal student loans servicers, EdFinancial, Maximus Federal Services, MOHELA, and Nelnet, asking them to provide information about staffing levels and their workload. 

Lawmakers wrote that the responses from these companies “in addition to troubling reports from individual borrowers that are having problems with their servicers, leave us deeply worried about your preparedness for this unprecedented return to repayment”. They are also asking for updates on the current borrower experience and the actions servicers have taken to shield them from harm.

In response to the solicitation of information by the lawmakers, EdFinancial wrote in its response letter, “Edfinancial has been working very closely with the Office of Federal Student Aid, U.S. Department of Education (“FSA”) in preparation for the repayment resumption. Collectively we have done our best to project the inbound call volumes, staffing needs, back-office processing volumes and other components that will allow our borrowers to receive assistance and customer service they deserve despite the unprecedented nature of the lengthy repayment pause.”

These reports point to an unsavory possibility: When student debt borrowers will resume payments in October, not only will they have greater amounts of debt than before, their experience of making payments may be starkly different from when the forbearance period had started.