Should markets fear a SURGE in student loan default rates?
U.S. student loan default rates are anticipated to increase as the government resumes collection efforts on defaulted loans for the first time since the pandemic, according to analysts at Capital Economics.
While this development is unlikely to severely impact overall household finances, the brokerage suggests it presents another factor contributing to a projected slowdown in consumption growth this year.
Capital Economics flags that despite the Supreme Court’s rejection of the Biden administration’s broad student loan forgiveness plan, some relief measures were implemented.
The Fresh Start program reinstated defaulted loans to current status and eliminated past-due balances.
Additionally, the Saving on a Valuable Education (SAVE) plan reduced payments for millions of borrowers following the resumption of payments in October 2023 after the pandemic-induced pause.
A one-year grace period followed this resumption, during which the consequences for non-repayment were limited.
However, Capital Economics notes that this grace period has ended, and the Trump administration’s pre-pandemic policies are being reinstated.
The Department of Education has confirmed that it will recommence collecting on defaulted student loans, which may involve actions such as wage garnishment, as well as the withholding of tax refunds and federal benefits.
The SAVE plan, characterized by Capital Economics as effectively acting as "student loan forgiveness in stealth," faces an uncertain future.
While those enrolled in the SAVE plan are currently not required to make payments, Capital Economics indicates that Republicans are expected to challenge and potentially eliminate the program.
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In terms of credit health, affected borrowers are seeing modest declines in their credit scores following delinquency.
However, the brokerage notes that even this deterioration does not appear to be leading to increased defaults in other areas of household borrowing.
This further supports the view that the broader financial system remains insulated from the effects of student loan distress.
From a macroeconomic standpoint, the drag on overall U.S. economic activity is expected to be small.
The structure of the student loan system, combined with targeted relief measures such as income-driven repayment plans, is helping to cushion the blow.
While individual households may experience hardship, the aggregate impact on consumption and financial markets appears minimal.
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The student loan debt will not disappear. It will be paid by either the student who borrowed the money or by the US taxpayer. As a taxpayer and a person who paid my student loan, I would prefer the person who took out the loan pay back their loan by themselves. Too many young people think that someone else should pay their way through life, but life doesn’t work that way!
You either carry your own weight or get left behind to suffer the consequences. Life doesn’t owe you anything but the chance to persevere and move on. Otherwise, lay down and die. That is the reality of life and the sooner you learn that, the greater your chances of survival.