The pandemic significantly changed how Americans borrowed money in the last year.
Thanks to historically low interest rates for new homeowners and stimulus checks that gave consumers windfalls of cash, mortgage borrowing went up while more credit card balances got paid off.
Student loan debt, however, had the biggest change of any debt type, credit bureau Experian found.
Experian'slatest datashows a record high in student loan balances in 2020, after four years of being one of the slowest-growing consumers debts. From 2015 to 2019, student loan debt increased only about 6% per year, but since the onset of the pandemic, that growth has doubled.
In the past year, the overall student loan balance increased by 12%, Experian found. Total U.S. outstanding student loan debt is now over $1.57 trillion, a record high and $166 billion increase year over year.
Most of this increase in student loan debt can be attributed to the federal loan payment pause that began with the CARES Act and has since extended until October 2021. With these Covid relief measures put into place early on in the pandemic, the number of loans currently in forbearance or deferral is more than double what it was a year ago, according to Experian data.
Here's a look at Experian's findings on student loan trends.
Consumers are borrowing more, plus not paying off their existing debt
Despite a 12% increase in overall student loan debt, Experian found that new student loan originations saw little growth in 2020.
It's not necessarily new borrowing that is driving record-high levels of student loan debt, but it's borrowers taking out more loans on top of the ones they already have outstanding. Borrowers are taking advantage of the paused repayment on their federal loans by not making any payments at all.
Experian found that student loan debt not in repayment spiked 114% in 2020, while the total number of accounts with this status doubled, growing 104%.
Student loan borrowers see record-high balances
Since most borrowers aren't paying off their student loans at this time, Experian data found that individual balances grew to a record-high of $38,792. This is an increase of over $3,000 per borrower.
The 9% increase in borrowers' balances outpaces the 6% rise in balances that occurred between 2015 to 2019.
Those borrowers who saw the biggest spike (10%) in their balances last year had an average credit score between 580 and 669, which is considered "fair" on the FICO®Score model.
Student loan delinquency rates decrease
The suspension of federal student loan payments in effect since March 2020 with the passing of the CARES Act has caused delinquencies to drop significantly.
Student loan delinquency rates across all 'days past due' (DPD) ranges (30 to 59 DPD, 60 to 89 DPD and 90 to 180 DPD) went down by double-digit percentages.
These improvements in delinquency rates have been seen with most types of debt, including credit cards, mortgages and personal loans, which certainly helps to improve borrowers' credit scores.
Nearly three-fourths of student loan accounts are in forbearance or deferral
According to Experian data from Q3 2020, 72% of student loan accounts were reported in forbearance or deferral. These 72% of accounts alone represent almost $1.1 trillion worth of paused student loan debt.
Instead of paying down their student loans, borrowers can use this money to cover higher-priority expenses, like housing, food and utilities. However, those that can keep up with basic monthly costs may want to consider still paying down their federal loans even during the forbearance period, when the money goes directly toward their principal balance.
As borrowers wait to see if any student loan forgiveness will happen in the coming months, they can also deposit their monthly loan payments into aFDIC-insuredhigh-yield savings account while interest is at 0%. This strategy will prepare a nest egg and help them be ready to make payments again or, in the case of forgiveness, it will give them anemergency fund to have as a safety net.
A high-yield savings like the Synchrony Bank High Yield Savings offers an above-average interest rate, plus an ATM card that gives you easy access to your cash should you need it in the meantime.
Whether borrowers choose to hold off on their federal loans right now or to start making payments is entirely up to them. The most important takeaway is to have a plan in place so that when payments do eventually resume, they know their next best move.
Synchrony Bank is a Member FDIC.
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Information about the Synchrony Bank High Yield Savings Account has been collected independently by CNBC and has not been reviewed or provided by the bank prior to publication.
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FAQs
Total U.S. outstanding student loan debt is now over $1.57 trillion, a record high and $166 billion increase year over year. Most of this increase in student loan debt can be attributed to the federal loan payment pause that began with the CARES Act and has since extended until October 2021.
What are three reasons why the total amount of student loan debt is increasing? ›
Sources
- Student Loan Debt Crisis.
- History & Underlying Causes.
- Increased Tuition & Fees.
- Decreased State Funding.
- For-Profit Education & Institutional Dishonesty.
- Declines in Degree Values.
- Effects of the Student Debt Crisis.
- Economic Consequences.
Higher education financing allows many Americans from lower- and middle-income backgrounds to invest in education. However, over the past 30 years, college tuition prices have increased faster than median incomes, leaving many Americans with large amounts of student debt that they struggle or are unable to, pay off.
What are some reasons that the amount of college debt has increased so much over the past 40 years? ›
This may be explained by a variety of factors, including student utilization of more unsubsidized loans, higher interest rates for public and private loans, fewer scholarships and other financial aid available to students, and a rise in the amount borrowed to cover the necessary cost of living beyond tuition costs.
What is causing the spike in student loan debt? ›
It's the result of a decades-long explosion in borrowing coupled with soaring education costs. The Federal Reserve data shows people under the age of 30 are more likely to have student loan debt compared with older adults – underscoring the crippling burden on another generation of Americans.
What is the major reason for the federal debt increases? ›
Tax cuts, stimulus programs, increased government spending, and decreased tax revenue caused by widespread unemployment generally account for sharp rises in the national debt. Visit the Historical Debt Outstanding dataset to explore and download this data.
Who does student debt affect the most? ›
Black and Latino borrowers are disproportionately impacted by student loan debt. Due to racial wealth disparities, most Black and Latino college students come from low-income backgrounds and can count on only a fraction of the financial support.
What is the main problem with student loan debt? ›
Loan Debt Is an Economic Drag
According to a CNBC report, “85 percent of student loan borrowers say difficulty in saving has delayed their ability to buy a house,” and other research indicates that “Those with student loan debt also are less likely to have taken out car loans. They have worse credit scores.
What are the root causes of student loan debt? ›
Soaring college costs and pressure to compete in the job marketplace are big factors for student loan debt. Student loans are the most common form of educational debt, followed by credit cards and other types of credit. Borrowers who don't complete their degrees are more likely to default.
Why shouldn't student loans be forgiven? ›
The rapid inflation in the cost of college is, in large part, due to rampant government subsidies in higher education. Forgiving student loans only makes that problem worse. The Success Sequence is a formula that outlines areas we can work in that will reduce poverty.
They found that attending a for-profit college was the strongest predictor of student loan default — greater than college completion, major, college selectivity, or a student's income level.
Are Millennials running up more debt than ever before? ›
Americans — particularly Millennials and those with lower incomes — are becoming increasingly overextended financially: Credit card and auto loan delinquencies have not only surpassed pre-pandemic levels, they're the highest they've been in more than a decade.
Why is it so hard to pay off student loans? ›
Interest
When you take out student loans, you don't just repay the exact sum you borrowed. For example, if you take out $20,000 in student loans, you're generally going to end up spending well more than $20,000 by the time your student debt is paid off due to accrued interest.
Why did my student loan balance increase during the pandemic? ›
Student Loan Forbearance and Delinquency during the Pandemic
After the onset of the pandemic, forbearance rose across all loan types with Direct loans rising to almost 100 percent due to administrative forbearance.
Why has my student loan payment doubled? ›
Increased income
If you have an income-driven repayment plan, you have to recertify your information each year. If your income goes up, your payments could go up.
Why is student debt a social issue? ›
Over time, the rising cost of higher education has steadily outpaced the financial means of low-wage workers to participate in these opportunities, currently leaving 43.6 million borrowers with student debt. Student loan debt negatively impacts workers' economic mobility, the labor market, and racial wealth inequality.
Why is my student loan amount increasing? ›
Factors like accruing interest, capitalization, and even the type of repayment plan you use can all contribute to rising student debt. Interest accrues on your student loans daily, and if your monthly payments aren't enough to cover the interest, it may also capitalize in certain instances.
Why did student loan payments increase? ›
Variable rates. If your student loan has a variable rate, it's possible your interest rate increased, resulting in a higher student loan payment.
What increases your total loan balance student aid? ›
The primary factors that increase your total loan balance are loan interest, recapitalized interest, fees, and variable interest rates.
Why is my loan balance increasing? ›
The loan agreement involves repaying the loan principal with interest. Depending on the loan structure, the interest rate tied to your loan can cause the loan balance to increase over time. In many cases, interest can compound over time through a process called interest capitalization.
