Student Loan Repayments Implicated in Credit Card Delinquencies
A recent report from the Federal Reserve Bank of New York reveals that an increasing number of Americans are falling behind on their monthly credit card payments. The data suggests that student loan repayments could be a contributing factor to this concerning trend. Initially, credit card delinquencies experienced a decline during the early stages of the pandemic due to substantial government stimulus packages. However, they have steadily risen as a result of high inflation and interest rates, making it challenging for Americans to pay off their credit card balances each month.
The findings from the New York Fed indicate that, as of December, about 3.1% of outstanding credit card debt was in some stage of delinquency. This percentage is slightly higher than the previous quarter’s 3% but still lower than the average 4.7% rate observed before the COVID-19 pandemic. Economic research adviser at the New York Fed, Wilbert van der Klaauw, highlights that “credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels,” which suggests increased financial stress, particularly among younger and lower-income households.
Credit Card Delinquencies Continue to Rise
During the fourth quarter, credit card delinquencies continued to increase from their pandemic-era lows. Between October and December, approximately 8.5% of credit card debt shifted into delinquency, compared to an 8.01% uptick in the third quarter and a 5.87% rise one year ago. The most significant rise in delinquencies was observed among individuals aged 30 to 39.
New York Fed researchers state that this trend may not be an alarming signal but could indicate a slight weakening in household balance sheets, consistent with a potential slowdown in consumption as 2024 progresses. The researchers suggest several possible reasons for the increase in delinquencies among younger Americans. It could be attributed to the resumption of student loan payments or indicate that this age group overextended themselves financially when they received stimulus payments during the pandemic.
Resumption of Student Loan Payments Impacts Borrowers
The researchers argue that the resumption of student loan payments may have a significant impact on younger Americans. Federal student loan payments restarted in October, following the decision by President Biden not to extend the pandemic-era pause initiated by former President Trump. Although payments officially resumed in October, interest started accruing again on September 1.
The average monthly bill for student loans ranges between $200 and $299 per person, although it is even higher for some borrowers, according to recent Federal Reserve data. In October, borrowers collectively resumed paying approximately $10 billion per month, as reported by JPMorgan. The researchers note that the effects of student loan delinquencies will not be evident until later this year but anticipate some spill-over into other types of debt. They suggest that the resumption of payments may increase pressure on younger Americans, as well as other age groups.
Financial Shock Expected as Student Loan Payments Resume
Additionally, the resumption of student loan payments coincides with the ongoing challenges faced by consumers, including high interest rates and elevated prices for everyday goods that diminish their purchasing power. Experts warn that the addition of student loan payments could deliver a financial shock to millions of Americans.
Many borrowers had hoped for loan forgiveness, but the Supreme Court struck down President Biden’s plan to erase up to $20,000 in loans per borrower. Despite this setback, the White House has announced other initiatives to address student loan debt, including the cancellation of $127 billion owed by approximately 3.6 million borrowers.