Student loan arrears are surging in the United States. As the repayment pause put in place during COVID-19 by the previous Biden administration ended, arrears rates have jumped, and a hiring freeze has worsened conditions for young people, raising concerns about financial stability.
According to the Financial Times (FT) and other foreign media on the 14th local time, at least 9 million borrowers have missed at least one student loan payment so far this year. The Financial Stability Oversight Council (FSOC) noted in a recent report that "student loans are a 'notable exception' even as delinquency rates across household debt remain relatively stable."
In fact, the size of arrears is growing rapidly. Total U.S. student loan outstanding loan balance is about $1.7 trillion, and the share at least 90 days in arrears reached 9.6% in the third quarter. That rate was 0.5% in the same period a year earlier, showing a 1,820% increase in just one year. FSOC said, "Since credit reporting resumed, more than 9 million student loan borrowers have shifted into arrears."
A slowing U.S. labor market is cited as the backdrop for the spike in arrears. New graduates entering society are failing to find stable jobs and cannot shoulder the repayment burden. Charlie Wise, vice president of the global institutional sector at TransUnion, said, "Borrowers literally don't have money," and "the recent fragility of the job market is being laid bare."
Survey results support this. In a TransUnion survey of 196 borrowers who missed payments, nearly half said they "have no capacity to repay," and about a quarter said they "are hoping for additional benefits related to the government's student loan forgiveness policy." The current median monthly student loan payment in the United States is about $200.
Earlier, the U.S. government placed federal student loans into a repayment pause in 2020 at the onset of the COVID-19 pandemic. The measure was extended multiple times; repayments resumed in Oct. 2023, but arrears began to be officially classified only from last September. Wise criticized this, saying the government "acted overly tepidly in rebooting the repayment system."
Arrears are directly affecting personal finances. According to the VantageScore credit-scoring system, borrowers who failed to repay student loans this year saw their credit scores drop by an average of 100 points, with many falling from the low-600s "near-prime" range to below 550, or "subprime." FSOC also said in its report that 56.6% of new borrowers in arrears saw their scores fall below 620.
Diane Swonk, chief economist for KPMG U.S., said, "A substantial number of individuals are being shut out of the credit market by small repayment hurdles," diagnosing that "as a result, their opportunities to build asset are narrowing even further."