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While markets are preoccupied with the tariff war and trajectory of Federal Reserve policy, there is another potential headwind to growth that may be quietly building. After the three-year pause on federal student loan interest and payments ended, a federal student loan “on-ramp” period was introduced from October 1, 2023, to September 30, 2024. During this 12-month safety net program, loan interest resumed, but student loan borrowers were temporarily protected from negative consequences of late or missed payments, including being reported to credit bureaus or debt collection agencies, or placed in delinquency or default. The on-ramp period has ended, creating financial pressure for borrowers with potential implications for the broader consumer debt market.

As of the first quarter of 2025, 10.1 million student loan borrowers are in forbearance, according to Bank of America Research.1 During forbearance, borrowers are not required to make payments. However, as they transition out of forbearance into repayment, we expect to see higher delinquencies and defaults. Currently, 5.95 million are delinquent by 90 to 180 days, says Bank of America Research. The total federal student loan portfolio grew to $1.66 trillion with 45.2 million borrowers as of the end of the second quarter. High delinquency rates, which are currently at 27% of all loans and 11% of loans in repayment status, indicate rising risk of defaults. A significant number of borrowers owe under $20,000, but most of the debt is concentrated among those owing over $100,000.1,2

Some research suggests that student loan delinquencies could surpass pre-pandemic levels. And the heightened risk of recession could exacerbate the financial pressures on these borrowers. As missed payments begin appearing on credit reports, a significant number of borrowers could see substantive declines in credit scores. We will be closely monitoring student loan delinquency trends given that the impact will be felt on other consumer credit and consumer spending.

 

Sources

  1. Bank of America Research, “Federal Student Loan Portfolio Update,” May 5, 2025.
  2. Federal Student Aid, Federal Student Loan Portfolio, March 2025

Tracy Chen, CFA, CAIA

Portfolio Manager

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