Increased debt load poses risk to student loan borrowers

In our previous blog post on this topic, we noted how the student loan repayment pause led to disproportionately greater FICO® Score increases for student loan borrowers than non-student loan borrowers since the start of the pandemic. That’s because student loan borrowers don’t have new delinquencies on federal student loans and haven’t been required to make federal student loan repayments during the student loan forbearance period. Additionally, we noted that default rates of student loan borrowers on some non-student loan products were higher than they had been pre-pandemic – a similar trend to that observed for the rest of the U.S. population.

In this blog, we’ll focus on student loan borrowers’ pandemic-era behavior in the ‘amounts owed’ category. ‘Amounts owed’ is the 2nd most important category of the FICO Score at 30% of the score calculation. As shown in Figure 1, we observed a material decline in average scheduled monthly installment loan repayments for student loan borrowers over the first year of the pandemic. Student loan forbearance meant they no longer had to make their monthly student loan payments, which were typically in excess of $200.

Figure 1: Average scheduled monthly installment loan repayments, relative to January 2020 benchmark

However, the trajectory of growth in scheduled monthly installment loan payments has been slightly greater for student loan borrowers than non-student loan borrowers since April 2021. We’d expect the trajectory for student loan borrowers to accelerate further when student loan forbearance ends, since the Department of Education's COVID-19 student loan forbearance program ends with interest resuming on September 1, 2023, and payments restarting in October 2023. Therefore, scheduled monthly installment loan payments will suddenly increase for federal student loan borrowers.

The extent to which student loan borrowers will have to repay student loan debt will also be dependent on the Department of Education’s ability to provide targeted student loan debt forgiveness after the Supreme Court’s June 2023 decision to overturn the Department’s initial plan to eliminate student loan debt for student loan borrowers making less than $125,000 per year.

We were curious if the student loan population has broadly deleveraged on other forms of debt in anticipation of the end of the student loan payment pause, but we could not find any evidence that this is the case. Figure 2 demonstrates that the student loan population increased their auto debt slightly more than the non-student loan borrower population during the pandemic.

Figure 2: Average auto loan balances, relative to January 2020 benchmark

Both groups experienced increases in auto debt since car prices have increased since the start of the pandemic.

Student loan borrowers have also had a greater relative increase in credit card debt than non-student loan borrowers, as seen in Figure 3.

Figure 3: Average credit card balances, relative to January 2020 benchmark

Both groups were able to increase savings and substantially pay down debt in the first year of the pandemic, driven by government stimulus and reduced spending. Since then, as pandemic-related restrictions have eased, both groups have increased their discretionary spending, and by extension, their credit card debt. However, student loan borrowers have increased their credit card debt beyond their pre-pandemic benchmark, while non-student loan borrowers have not.

It’s important to note that these are aggregate trends, and that not all student loan borrowers increased debt over the last few years. Figure 4 illustrates this point: while 43% of student loan borrowers increased their total monthly installment loan payments between April 2021 and April 2023, 26% of this population decreased their monthly installment loan payments.

Figure 4: Student loan borrowers’ difference in scheduled monthly installment loan repayments between April 2021 & April 2023

Those who have decreased their scheduled monthly installment loan payments over the last 2 years by paying off debt or refinancing into lower monthly payments may be in better position to absorb the impact to their monthly debt service once the student loan payment pause ends. However, those who increased their scheduled monthly installment loan payments may be less financially prepared when student loan forbearance ends, potentially resulting in increased credit card debt or missed payments. A notable increase in credit card balances, especially if paired with a new delinquency reported on the credit file, could largely negate any improvement in the FICO® Score that the student loan borrower has experienced over the last few years.

The end of student loan forbearance means that these consumers are no longer eligible for interest-free federal payment pauses and will need to make student loan payments that they haven’t had to make in over 3 years. If the Department of Education's 12-month “on-ramp” to student loan repayment is implemented, federal student loan delinquencies would not directly impact credit scores until December 2024, since federal student loan missed payments would not appear on credit reports until then. That said, any indirect impacts from the end of student loan forbearance that cause increases in credit card balances or increased delinquency on other credit obligations could impact FICO® Scores. Ultimately, credit score impacts related to the end of the student loan payment pause will be determined by whether many student loan borrowers are prepared for the end of forbearance, as well as the scope of any policies that the Department of Education is successfully able to implement in the coming months.