N.Y. Fed Finds that Student Loan Freeze Led to Improvements in 30 Million Consumers’ Credit Scores

Economists at the Federal Reserve Bank of New York said that the freeze on student loan payments from the pandemic drastically improved credit scores of Americans who borrowed money for college. Roughly 30 million people saw gains in their risk profile, with a majority of improvements going to borrowers who were delinquent before the pandemic.

“The end of forbearance will have impacts on credit scores, borrowing, and household cash flow over the coming year for the 38 million federal borrowers that have benefited from the pause,” wrote the New York Fed researchers, according to Yahoo Finance. “Some borrowers will enter delinquency or default.”

The moratorium for federal student loans is set to expire on August 31, although the Biden administration is considering another extension and partial debt forgiveness for some borrowers. While repayments have been on hold, about two-thirds of debt holders had growing or flat balances at the end of 2021, an increase of roughly 3.2 million borrowers.

In 2019, the share of student-loan balances held by subprime borrowers was 36 percent, and fell to 26 percent in 2021 because loans owed to the federal government that were delinquent pre-pandemic were marked as current under the forbearance policy.

There was also a change in the typical size of debts, as bigger loans made up more of the total. Additionally, 5.4 million people with outstanding student debt at the end of 2019 owed nothing by the end of 2021.

Economists said that when the forbearance period ends, loan amounts are expected to rise and delinquency rates in southern states are expected to have worse outcomes.