February 26, 2021 – By Jessica Smith and Aarthi Swaminathan
The federal payment pause on student loans has given some debtors breathing room. But a new survey shows how borrowers have taken advantage of the pause to target their loans.
In January, the Biden administration extended the interest-free payment pause on federal student loans to at least Sept. 30, 2021.
While student loan borrowers don’t technically need to repay their debt as the government continues to make the payments on their behalf, some have used the opportunity to drill down on their loans, specifically targeting their principal. And these borrowers are likely to emerge with a lower balance by the end of the pause.
According to a new survey by Yahoo Finance and Harris Poll of 1,059 respondents, 22% said they had student debt. But despite the payment pause offering a way to target their debt, 44% of those borrowers said they had not paid down their balance since March.
In contrast, 56% of debtors said they made “some” or “all” of their student loan payments since March 2020.
“If you can afford to make extra payments on your student loans, that could help you pay them down faster and reduce the amount of interest you pay overall,” Steve Trumble, president and CEO of American Consumer Credit Counseling, said in a press release. The nonprofit has been ramping up its efforts to educate clients on what options they have after the payment pause ends.
Most of the debtors surveyed said they hold their own student loans, but 23% said they were also responsible for their partner’s or spouse’s loans, and 16% for a dependent. Nearly one-third of respondents paying off their own debt were carrying around $20,000 to $40,000 in student loan debt. About 70% of all borrowers surveyed held less than $40,000 in student debt.
But amid the payment pause, loans in serious delinquency have dropped sharply, as seen in the chart below, as debt collections and offset activities on federal loans have also been temporarily paused by the government.
External effects of debt on borrowers’ credit
Currently, outstanding student loan debt in the U.S. stands at $1.56 trillion as of the fourth quarter of 2020, the New York Fed reported this month.
This debt burden has had an effect on borrowers’ lives, the survey showed.
For instance, about 40% said they had reduced spending on things like replacing an old car, or dining out, and even passed on up investing, starting a business, or saving for retirement. More worryingly, 27% said they’ve delayed getting medicines, surgery or even doctor’s appointments because of their debt concerns.
The debt burden also impacted other types of consumer finance and wealth creation products as well: 30% said they had delayed buying a home. In a separate study by the National Association of Realtors, 47% of home buyers said their student loans made it difficult to save for a down payment. For first-time buyers in particular, 51% said student loans were holding them back from saving for a down payment.
“You do start to see longer-term negative effects on people who can’t pay off their student loans,” Federal Reserve Chairman Jerome Powell stated previously. “It hurts their credit rating, it impacts the entire half of their economic life.”
At the same time, millions of borrowers have also been left out of the payment pause repeatedly, including those with commercially-held but federally-backed Federal Family Education Program loans, as well as those with private student loans.
While President Joe Biden considers cancelling student loan debt to help borrowers through the pandemic, Democrats have been pushing him to cancel $50,000 in student debt via executive order. Respondents to the poll said that lawmakers’ positions on loan forgiveness helps them frame their own.