When we go on vacation, most of us sleep late, basking in the luxury of rising in the morning whenever we wish.
Then our vacation ends, and we have to set our alarm clock again. And we find it damned difficult to pop out of bed at 6 AM to get to work on time.
Something like that will happen when the U.S. Department of Education ends its pause on student loan payments. Student debtors enjoyed a grace period on their loan obligations during the COVID pandemic. They could skip their monthly student loan payments without penalty and spend that extra cash on other things—a new car, maybe.
Millions of student borrowers benefited from this loan-payment holiday, but nobody knows how many will start making monthly payments again when the holiday comes to an end in February.
According to Politico, Education Department officials have instructed loan services to create a "safety net" for borrowers for the first three months after payment obligations begin:
Borrowers who miss a payment during the initial 90-day period will not take a hit on their credit reports. Those borrowers will instead be automatically placed in a forbearance and be still considered current on their loans.
Student borrowers will appreciate the safety net, but will they start making their monthly loan payments again when the government's loan-payment pause finally ends?
Even before the pandemic, the default rate on student loans was considerably higher than the default rate on credit cards and car loans.
And this pattern makes sense. Overburdened debtors who stop making car payments lose their cars. If they quit paying on their credit card balances, their cards get canceled.
But if student-loan debtors stop making payments on their student loans, nothing happens--at least not immediately.
I predict that student loan defaults will spike upward this spring. Millions of student-loan debtors got permission to stop making payments in the spring of 2020, and they will find it challenging to start writing those monthly payments again, even when they are legally obligated to do so.
To paraphrase a great country singer, I think many college debtors will take their cue from Johnny Paycheck and tell the Department of Education to take their student loans and shove 'em.