In the United States, as the repayment of student loans that was postponed during the COVID-19 pandemic resumes, the number of individuals in arrears is surging. Concerns have arisen that the government’s resumption of enforced collections could dampen consumption and lead to an economic slowdown.
On the 26th (local time), The Wall Street Journal (WSJ) reported that cases of declining credit ratings have surged in the U.S. since the resumption of loan repayments. According to the New York Federal Reserve Bank, approximately 5.6 million individuals were newly classified as student loan delinquents in the first quarter of this year. The delinquency rate skyrocketed from 0.7% in the previous quarter to 8%, returning to pre-COVID-19 levels.
Previously, the Donald Trump administration intensified enforced collection procedures targeting borrowers who had deferred repayment for a long time. Education Secretary Linda McMahon stated last month, “Starting from May 5, we will include approximately 1.8 million borrowers in the repayment plan and commence collections on defaulted loans.” As a result, wage garnishments and tax refund levies have resumed, significantly increasing the burden on debtors.
In particular, the seriousness of this situation is underscored by the fact that it is not confined to low-credit individuals. The Federal Reserve noted that a significant portion of the newly classified individuals in arrears were middle-class individuals who had previously maintained sub-prime or prime credit ratings. This corresponds to the range of credit scores from 620 to 719 (out of 850).
Due to the sharp decline in credit ratings, many borrowers are being pushed out of the institutional financial system. According to WSJ, new delinquents saw their credit scores drop by an average of 140 to 177 points, facing difficulties in all aspects of basic financial life, including purchasing dwellings and vehicles, as well as obtaining credit cards.
Furthermore, the decrease in consumption capacity is impacting the macro economy. Morgan Stanley stated, “The resumption of student loan repayments will reduce consumption by about $1 billion to $3 billion per month,” and analyzed that “the U.S. gross domestic product (GDP) could decrease by 0.1 percentage points this year.”
Among those affected, vulnerable groups are experiencing even greater impacts. Young adults who graduated during the COVID-19 pandemic, two-year college graduates, and college dropouts are representative examples. In Mississippi, where the regional poverty rate is high, the delinquency rate is nearing 45%, recording the highest figure in the country.
Leslie Turner, a professor at the University of Chicago, emphasized, “Those struggling with student loan repayment are not high-income individuals but rather vulnerable groups,” and stated, “It is urgent to support policies for those lacking repayment capacity.”