Michael S. Derby
4 min read
By Michael S. Derby
(Reuters) -U.S. student loan borrowers ran into trouble during the first quarter after the government lifted a long-running moratorium on debt repayment implemented during the COVID-19 pandemic, a report from the Federal Reserve Bank of New York said on Tuesday.
As part of its quarterly review of household debt trends, the bank said that total level credit that had fallen into delinquency rose to 4.2% of outstanding loans, from 3.6% in the fourth quarter of last year, as part of an ongoing return to pre-pandemic trends.
Some 7.7% of student loans in the first three months of the year were 90 or more days delinquent versus just under 1% in the fourth quarter of 2024. Meanwhile, most other types of borrowing troubles were largely steady in the first quarter relative to the end of 2024.
In a blog posting, bank economists wrote that the rise in delinquency rates tied to return of required student loan payments is a return to the pre-pandemic trend, and they noted the ramifications of troubled student debt levels is “severe.”
The surge in student loan delinquencies was not a surprise given the end of the 43-month payment pause, which had led to a large decline in troubled loans. A government on-ramp to return to payments ended in October and as of the first quarter, the bank said troubled loans are concentrated in southern states, with older borrowers dominating the delinquent loans.
New York Fed economists noted the troubled student loan situation will bring economic pain, amid some uncertainty about how the situation will play out.
“Millions of borrowers face steep declines in their credit standing which will increase borrowing costs or severely limit their access to credit like mortgages and auto loans,” the bank’s blog posting said. “It is unclear whether these penalties will spill over into other credit products.”
That said, New York Fed researchers cautioned that some borrowers may have been caught off guard by the return to payments and may sort themselves out quickly. It could take several quarters to get a clear read on the student loan delinquency situation, they said.
In a report from early May, Morgan Stanley economists said renewed debt payments will likely slow growth marginally and add to a challenging outlook.
"We were already looking for consumer delinquencies and defaults to rise modestly again in 2026 due to tariff uncertainty, slower growth, higher inflation, and modestly higher unemployment," the research note said. "Higher cash outflows for student loans and default collections increase the risk from here."
