Federal student loan borrowers are likely to experience a notable increase in delinquencies once forbearance concludes in May, a report from the Federal Reserve Bank of New York found.

The federal government paused required payments on student loans when the pandemic began in 2020, and has since extended forbearance a number of times. Now, payments are scheduled to restart in a little over a month, which will impact 37 million borrowers. 

Another 10 million borrowers with private loans or Family Federal Education Loans owned by commercial banks were not granted the same federal relief and continued to make payments during the pandemic. Their delinquency rate returned to pre-pandemic levels a year ago, suggesting trouble for direct borrowers once the pause on payments ends.

“Although borrowers will likely face a healthier economy going forward, direct loan holders have higher debt balances, lower credit scores, and were making less progress on repayment than FFEL borrowers prior to the pandemic,” researchers said in the regional Fed’s Liberty Street Economics post. 

“We believe that direct borrowers are likely to experience a meaningful rise in delinquencies, both for student loans and for other debt, once forbearance ends.”

Prior to the pandemic, fewer than half of federal borrowers were making progress on their loans, and 43% of borrowers were seeing their balances increase, meaning that their payments were too small to cover accruing interest. Beginning in 2020, however, the share of borrowers with increasing balances dropped to nearly zero due to forbearance. 

Of the borrowers who had increasing balances prior to the onset of Covid-19, 83% had no change in their balance during the pandemic and 9% made some progress. Between March 2020 and April 2022, an estimated $195 billion worth of payments will have been waived, the Fed paper said.

With debt relief set to end, millions of borrowers will restart payments with little progress made on reducing balances during the pandemic. That said, the White House has signaled in recent weeks that it may extend the pause for federal student loan borrowers once again, which would delay the rise in delinquencies.

--With assistance from Alex Tanzi.

This article was provided by Bloomberg News.

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