Leaving Them Hanging: Student Loan Forbearance, Distressed Borrowers, and Their Lenders

Abstract

Multiple extensions of the federal student loan forbearance program since March 2020 resulted in a temporary payment pause that lasted more than 3 years. We examine the impact of long-term forbearance on the evolution of borrowing by distressed individuals.

We observe substantial increases in credit scores within six months of forbearance. This credit score improvement is followed by increases in credit limits and new credit cards that allowed distressed borrowers to take on 12.3% more credit card debt relative to borrowers whose student loans were not in forbearance. Credit card borrowing is increasing and is being supplied mainly by banks, through both new and existing cards.

Borrowers in forbearance also accumulate 4.6% more in auto loans and significantly less total mortgage debt (driven by new mortgages). Auto loans are primarily driven by new auto loans, with non-banks serving as the most significant suppliers of new auto debt. As credit card and auto borrowing continue to increase, distressed borrowers in forbearance are beginning to fall behind on their nonstudent debt payments at higher rates, exposing lenders to losses. Moreover, after 3 years of forbearance, distressed federal student loan borrowers’ student loan balances are 12.1% higher than distressed borrowers whose student loans are not in forbearance. When forbearance is lifted, our results suggest that the extended breathing room that the program allowed may accelerate postforbearance financial distress.

Keywords: Student Loan Forbearance, Distressed Borrowers, Credit Scores, Consumer Debt, Defaults, Lenders

JEL Classification: D12, D14, G21, G23, I20, I22