The expected restart of student-loan repayments later this year could add to pressure on younger borrowers, who are already falling behind on debt in an era of high inflation and rising interest rates.
Americans in their 30s and younger are showing signs of financial strain. In the fourth quarter, they fell behind on credit-card payments by 90 days or more at a rate similar to that in 2009, at the end of the financial crisis. Those borrowers also hold more than 54% of outstanding student-loan debt, New York Federal Reserve data show.
About 40 million borrowers hold $1.6 trillion in federal student debt, with many of them owing hundreds of dollars a month. Most haven’t made payments on that debt since March 2020, when the federal government halted payments at the start of the pandemic. The suspension was extended several times by the Biden administration. But student-loan payments are expected to restart this summer after the Supreme Court acts on litigation challenging a Biden plan for mass student-debt cancellation.
“It is unprecedented that you have a multiyear pause on what’s known to be a difficult debt for a lot of people, and it just turns back on,” said Kathryn Anne Edwards, an economist at Rand Corp.
High inflation and rising interest rates are squeezing many households, but the shift in credit conditions is starkest among younger consumers. Borrowers in their 20s and 30s reached 90-day or more delinquency on credit-card debt and auto loans at a higher rate in the fourth quarter of 2022 than before the pandemic. Older age groups, in contrast, did so at or below their pre-Covid rate, researchers at the New York Fed said.
Millennial and Gen Z consumers accounted for about 30% of spending in 2021, up from approximately 25% in 2019, according to Labor Department surveys.
Student-debt delinquencies have plunged during the payment pause. Less than 1% of student debt in aggregate was 90 or more days delinquent or in default last quarter, as the Education Department launched a program that removed default status from about $34 billion in loans. That compared with an average of 11% from 2012 to 2019.
New York Fed researchers note that delinquency rates on student loans are roughly twice the reported rate because of grace periods, deferment and forbearance.
A Government Accountability Office report last year estimated that about half of borrowers would be at risk of delinquency and default when the payment suspension ends. The Biden administration has cited the risk of a surge in delinquencies and defaults as a justification for the debt-cancellation plan.
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If that program, which would wipe out up to $20,000 from qualifying borrowers’ debt balances, goes forward, it would entirely eliminate the debt balance for nearly half of federal student-loan borrowers. Many others would be left with smaller debt loads.
The Supreme Court is expected to rule on a challenge to the mass debt-cancellation program by July.
It is possible the payment freeze could end even sooner than the summer, at least for some borrowers. Private lender
SoFi,
which provides refinancing options for private and federal loan borrowers, has sued to overturn the latest extension on the grounds that it harms SoFi’s student-loan financing business.
The Education Department defended the legality of the pause and said ending it early would put borrowers at risk of financial harm.
Republicans on the House Education and Workforce Committee in a February statement called the continued suspension part of Mr. Biden’s “radical free college agenda to cancel over $1 trillion in student-loan debt.”
Higher living costs and soaring interest rates are driving the surge in delinquency rates on credit cards and auto loans, said
Bill Adams,
chief economist at Comerica Bank.
“Hard times fall hardest on people with the least means. The cost of living has risen across the board, but younger people have fewer resources to draw on to make ends meet,” he said.
He added that younger Americans are less likely to have savings to tap when their finances are stretched. And since they are more likely to rent, the sharp rise in rental costs has hit them relatively harder.
The average U.S. household spent an additional $275 last month because of higher prices, according to
Ryan Sweet,
chief U.S. economist at Oxford Economics.
“Those being hardest hit are low-income households because a bulk of their spending is on energy, food and rent where prices have risen significantly,” he said.
The pressure of rising prices has abated since last June, when inflation reached a four-decade high, which Mr. Sweet said caused households to spend an extra $500 a month.
Spending via credit cards and other consumer lending has filled the gap. Younger age groups have piled on debt relatively faster in recent quarters, the New York Fed data show.
Outstanding consumer debt for borrowers ages 18 to 29 rose 34% in the fourth quarter, from the first quarter of 2021, while borrowers ages 30 to 39 accumulated 25% more debt. That compares with an 11% increase in outstanding debt among those 40 and up.
Delinquency rates had slipped to historic lows at the beginning of the pandemic, in part because federal income support helped borrowers pay down existing debts and cover their spending, and because the strong job market has bolstered households’ finances. But federal support wound down in 2021.
“The working poor, the working class and the middle class have largely exhausted those cash reserves,” said
Joe Brusuelas,
chief economist for RSM US LLP.
Write to Gabriel T. Rubin at gabriel.rubin@wsj.com and Gwynn Guilford at gwynn.guilford@wsj.com
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