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The End of Student Loan Forbearance and the Student Lending Debt Crisis

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8 November 2023
Craig Focardi

Why Digitizing Collections and Customer Engagement Technology is Essential

Abstract

Among the many US federal policy changes, laws, and Federal Reserve actions initiated during the pandemic, loan forbearance has so far proven to be a successful policy. In mortgage lending, mortgage delinquency rates did not spike and most mortgagors resumed paying on time.However, lowered interest rates and a rebounding economy helped push up homeowner equity, and seriously delinquent mortgage borrowers could sell their home if they couldn’t afford to make the payments.

The economic situation with federal student lending and loan borrowers in forbearance is very different. Loan forbearance and interest payment forgiveness programs ended on September 1, 2023, loan payment requirements resumed on October 1, 2023. With respect to lender credit risks, however, student loan debt has no corresponding collateral asset to support the debt if the borrower defaults, and many student loan borrowers are financially weaker and have fewer assets than homeowners. It is also important to note that non-government, private student loans are not part of this program although individual lenders may offer forbearance to their private student loan borrowers.

So what does the end of student loan forbearance and interest forgiveness mean for financial institutions (FIs)? The impact of student loan forbearance programs ending creates generational challenges for financial institutions seeking to retain existing customer relationships.

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