Student-loan delinquencies poised to rise substantially, according to Deutsche Bank

By Joy Wiltermuth

Borrowers could face additional financial stress if their credit scores are affected

Student-loan delinquencies, after an extended pandemic-related pause in payments on roughly $1.5 trillion in debt, look set to climb substantially, according to researchers at Deutsche Bank.

Nearly 43 million borrowers with educational loans held by the government were slated to start repayments in October 2023, after interest and principal payments were largely frozen at the start of the COVID-19 pandemic in 2020.

The Education Department, in an effort to support borrowers and protect their credit scores, provided a one-year "on-ramp" in which loan servicers were not allowed to report any late payments on this type of debt to credit bureaus.

That period ends in October 2024. Deutsche Bank analysts led by Kayvan Darouian said on Friday that they expect delinquencies in student loans to "rise substantially in the coming months and generate many headlines."

The Deutsche Bank team put together the following chart showing that student loans were one of the weakest links in consumer credit before the pandemic, with the rate of seriously past-due loans hovering above 10% for much of the past decade.

"For borrowers who were having difficulties staying current on their federal student loans, we think this could result in additional financial stress as their credit scores will now be affected," the Deutsche Bank team wrote.

Read: End of student-loan 'on-ramp' means missed payments can hurt borrowers. Here's how to protect your credit score.

To complicate matters, payments on many student loans remain in limbo after the Biden administration last year enrolled roughly 8 million borrowers in its signature SAVE program, which has since been contested in court by a small group of Republican-led states.

SAVE was designed to lower monthly interest payments for millions of borrowers and to provide faster debt relief for some borrowers than other income-based repayment plans. A court-ordered pause on the initiative was briefly lifted this week but quickly put back on in place by a Missouri judge.

Interest rates on most consumer loans are set based on benchmark Treasury BX:TMUBMUSD10Y rates, which have been falling after hitting a peak of about 5% in 2023. But Congress holds the keys to cutting rates on outstanding student loans held by the federal government.

-Joy Wiltermuth

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10-04-24 1456ET

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