Amid record consumer debt, and rising credit delinquencies, student loan payments about to return
Borrowers already struggling to cover credit card and loan payments could be upended as student loan debt service restarts after a 3 1⁄2 year break
Earlier this month the New York Federal Reserve Bank reported the collective debt of U.S. credit card holders had surpassed the $1 trillion mark for the first time ever after rising nearly 5% in the second quarter of the year.
Along with reporting the new debt benchmark, New York Fed data also reflected credit card delinquency rates, which had been running at near-historic lows throughout the pandemic, were registering at 7.2% at the end of June, breaching the level that preceded the COVID-19 outbreak.
“We’ve sped way past normal,” Mike Brisson, a senior economist at Moody’s Analytics, said in a recent webcast, per The Washington Post, calling the elevated delinquencies “very concerning.”
The collective debt of U.S. credit card holders saw a precipitous drop during the pandemic, declining from $927 billion in the fourth quarter of 2019 to $770 billion in the first quarter of 2021, according to an analysis by LendingTree. But that debt balance has been on the rise since then. In a ranking of states by debt per card holder, Utah is No. 20 on the list with an average of $7,489.
A LendingTree report released last month also noted the average annual interest rate for all current cards stands at 20.86%, a record, and the average rate for new credit card offers is even higher, averaging 24.24% across the country.
Now, after a three-year hiatus, the resumption of required payments for those with outstanding federal student loan debt is looming in October and interest on those loans will start accumulating again beginning Friday. It could lead to heightened challenges for those already juggling household budgets to cover credit card and other consumer debt.
Following the latest household debt report from the New York Fed, LendingTree chief credit analyst Matt Schulz said that those facing bigger monthly credit card payments who will also have to reengage with student loan repayment plans later this year could find themselves facing some economic distress. According to the new report, collective outstanding U.S. student loan debt stands at $1.57 trillion.
“The resumption of student loan payments will be a huge test for many cardholders, shrinking the amount they have to devote to paying off card debt and leaving some people simply unable to make minimum payments at all,” Schulz told CNBC.
A report published in June by the Consumer Financial Protection Bureau highlighted a number of areas of concern as borrowers approach the resumption of student loan payments:
- More than 1 in 13 student loan borrowers are currently behind on their other payment obligations. These delinquencies are higher than they were before the pandemic, despite a small seasonal decrease in the most recent data.
- About 1 in 5 student loan borrowers have risk factors that suggest they could struggle when scheduled payments resume.
- Median scheduled payments on other debt obligations have increased by 24% for student loan borrowers likely returning to repayment. In percentage terms, these increases are especially large for younger borrowers (252%, or $65 to $229).
Authors of the report also encouraged borrowers who may be facing financial challenges due to other debt obligations to pursue plans that allow payments to be scaled to their income levels.
“Student loan borrowers who are already having difficulty with their other payment obligations are especially likely to struggle with their student loan payments if they don’t get some sort of payment relief like enrolling in an (income-driven repayment) plan,” the report reads.