Even with payments paused, student loan borrowers struggle

(NerdWallet) - Federal student loan borrowers haven’t had to make payments on their loans since March 2020, and the pause could continue until the summer of 2023. But even with that pressure off, more of them are struggling, according to a November report from the Consumer Financial Protection Bureau.

In September, 7.1% of student loan borrowers who were not in default on their loans at the start of the pandemic had trouble repaying other debts, up from 6.2% at the start of the pandemic, the study of about 34 million borrower credit reports found. Borrowers with a history of defaulted student loans are even worse off; the portion struggling with other bills jumped from 9.8% to 12.5% in that same time frame.

The percentage increases may seem small, but they represent hundreds of thousands of borrowers.

The situation could worsen when student loan repayment resumes next year, but one-time student debt cancellation of up to $20,000 per borrower — now on ice as the program’s legality is challenged by multiple lawsuits — could be a big help, the CFPB found. 

Here’s what the new data means, and what borrowers can do to prepare now.

Student debt cancellation could alleviate credit trouble

President Biden’s student debt cancellation plan — up to $10,000 per borrower who earns less than $125,000, and $20,000 for Pell Grant recipients — could have an outsized impact on those who expect to struggle when payments eventually resume. 

Nearly half of borrowers behind on other loans could have their student debt wiped away completely. Twenty-five percent of borrowers with a non-student-loan delinquency have less than $10,000 in student debt to pay off. Another 19% of these borrowers have balances between $10,000 and $20,000.

“Unless the [Education] Department is allowed to provide debt relief, we anticipate there could be an historically large increase in the amount of federal student loan delinquency and defaults as a result of the COVID-19 pandemic,” Education Department Undersecretary James Kvaal said in a recent court filing.

Ramifications are far-reaching. A credit payment of any kind that’s delinquent — or more than 30 days past due — can tank your credit score by as much as 100 points. Defaults can be even worse for a borrower’s credit score. The timing of when an overdue bill enters default depends on the loan type; in the case of most federal student loans, a borrower defaults when their bill is at least 270 days past due. 

A lower credit score can, for example, make it more difficult to rent an apartment or get a mortgage or auto loan in the future.

“A default is really, really bad … and the later [the payment] is, the more damage to your credit score,” says Bev O’Shea, a credit expert and former NerdWallet writer.

She encourages borrowers worried that they might miss a credit payment to ask their student loan servicers about forbearance and forgiveness programs as early as possible.

“It's better to ask the questions when you're worried that you might be late than after you've already had some problems and are in a bad way,” O’Shea says.

But will student debt cancellation happen?

We won’t know if loans will be canceled until next year.

Several lawsuits have put Biden’s broad student debt cancellation plan on hold. In February, the Supreme Court will hear oral arguments for a case brought by six states alleging that the debt relief would harm tax revenue in their states and the finances of state-based loan agencies.

“I'm still optimistic that forgiveness will happen, but of course, we've been surprised by the Supreme Court before,” says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors.

With forgiveness no longer certain, the White House announced on Nov. 22 that forbearance could extend as far as June 30, 2023 — or end sooner, if the litigation is resolved or the administration is allowed to implement the program. Borrowers will have to start paying student loan bills with interest starting 60 days after the final forbearance expiration date. 

“This extension means that struggling borrowers will be able to keep food on their tables during the holiday season — and the coming months — as the Administration does everything it can to beat back the baseless and backward attacks on working families with student debt,” said Mike Pierce, executive director of the Student Borrower Protection Center, in a statement following the news.

What borrowers can do now to prepare

With uncertainty and repayment looming in the months ahead, borrowers struggling with other bills can still get ahead. Start by taking stock of your situation. 

“My recommendation to anyone at this point is to log in and see what your monthly payment could be,” says Kristen Ahlenius, director of education at corporate financial wellness platform Your Money Line. “Your monthly payment may be different than what it was at the start of the administrative forbearance; your income might have changed, and you might be able to look into income-driven repayment options.”

Contact your loan servicer if you know you’ll struggle with repayment

Call your student loan servicer and ask about getting on an income-driven repayment plan. For those who qualify, IDR plans can cap monthly student loan payments at 10% of discretionary income while extending the life of the loan. A new IDR plan proposed by the Education Department could lower that cap to 5% and categorize more income as nondiscretionary, but it’s not yet available to borrowers. 

Depending on your income, monthly payments could be as low as $0 under IDR.

“Income-driven repayment plans become more financially beneficial the larger your household size is, and the lower your income is,” adds Ahlenius.

Build student loan bills back into your budget

Revisit your budget. If you’re worried about managing student loan repayments when forbearance ends, start putting money aside now to help cover your first few months of bills. Keep this money in a separate savings account, like a high-yield savings account.

You may also need to consider lifestyle adjustments to fit your student loan payment back in. 

Explore other options for forgiveness

Biden’s now-frozen student debt cancellation plan isn’t the only hope for student debt forgiveness. The government already offers nearly a dozen forgiveness programs for specific groups of borrowers, including teachers, nurses and public servants.