Fed says trouble may come with the end of the student loan moratorium

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Fed economists are predicting a rise in loan delinquencies

The moratorium on student loan payments enacted two years ago expires in May. At that point, millions of borrowers will have to resume monthly payments.

But a report by the Federal Reserve Bank of New York raises a cautionary flag. Economists say lifting the moratorium is almost certain to result in a rise in loan delinquencies.

When Congress placed the moratorium on Direct federal loan payments in March 2020, about 37 million borrowers were able to suspend their loan payments. Through next month, the Fed estimates that borrowers have been able to put off about $195 million in payments.

Fed researchers say these borrowers slowed their paydown over the last two years, with very few making voluntary payments on their loans. At the same time, student loan borrowers with loans from banks and private institutions – not covered by the moratorium – struggled to make payments.

‘Borrowers will face rising delinquencies’

The report also found that private student loan borrowers who were not able to suspend their payments generally had trouble paying their bills, with 33% showing higher rates of delinquency on other debt, excluding mortgages, than those who did.

“The difficulties faced by these borrowers in managing their student loans and other debts suggest that Direct borrowers will face rising delinquencies once forbearance ends and payments resume,” the authors write.

The report has produced calls for the moratorium to be extended. The Wall Street Journal reports that the Biden administration is under pressure from Congressional Democrats to extend the moratorium indefinitely. 

Some lawmakers, including Sen. Elizabeth Warren (D-Mass.), have renewed their calls for a portion of federal student loans to be forgiven. They have been joined by Anthony Noto, the CEO of Sofi, a major player in refinancing student loans.

Noto has issued a public appeal to the Biden administration to forgive up to $10,000 in federal student loan debt to help millions of borrowers get out from under a heavy economic burden that could take decades to pay off.

“We need the administration to take a stand,” Noto told Yahoo Finance. “Kicking the can down the road is not currently going to suit all the needs of the American people."

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