What the End of Student Loan Forbearance Means for Consumer Debt in 2023 and Beyond

The three-plus year forbearance period on federal student loan payments brought on by the CARES Act ― passed by Congress in March 2020 in response to the COVID-19 pandemic ― has come to an end on October 1st. In addition to suspending payments on all federal student loans, the CARES Act also dropped interest rates to zero during the freeze and suspended collection efforts against borrowers in default. 

Considering the sheer length of the forbearance, the return of student loan payments for nearly 43 million federal borrowers could throw a significant wrench in their finances, especially for those who’ve experienced changes to their income, overall debt, lifestyle, or another major life event. 

The Ripple Effect

One of the biggest issues for these borrowers is the ripple effect that returning student loan payments will have on their finances and month-to-month budgets. Yes, federal student loans went into a long, interest-free hibernation period, but many other forms of consumer debt ― private student loans, mortgages, auto loans, credit cards ― did not. If anything, the pause on student loans made it possible for borrowers to manage other bills, according to the Student Debt Crisis Center survey. 

The Entire Credit Spectrum is Going to be Impacted

What does this mean specifically for other forms of consumer debt? While the re-emergence of student loans will tighten the budgets for millions of borrowers juggling multiple bills and payments, it can also lead to a decline in applications for credit products. According to a survey by the Teachers Insurance and Annuity Association (TIAA), 49% of borrowers said the return of student loan debt would alter other life plans, like buying a home. 

Refinancing will be a Lifeline for Borrowers

Refinancing, in general, may become a vital option for borrowers managing multiple consumer loans while also being bogged down by high-interest credit card debt.

Considering the vulnerable state of mortgage applications, the added stress factor of student loan debt could play a major role in shaping the real estate industry. On the contrary, it could cause a spike in mortgage refinancing applications as borrowers look for other ways to save on debt payments and maximize their overall budgets. 

As for credit card debt, relief plans have varied from issuer to issuer, ranging from deferred payments to waiving fees. Rarely, however, are credit card holders provided with interest-free deferments on their account balances. Due to the compounding, high-interest nature of credit cards, consumers who are restarting their student loan payments could benefit from consolidating their card debt with a personal loan, which allows them to refinance the outstanding balance through installment payments, at a potentially lower, fixed interest rate. 

Be Prepared ― But Explore your Options

No matter what situation a given student loan borrower finds themselves in, it’s important to have a plan in place and be as prepared as possible. Being prepared can mean knowing when your first payment is due (most borrowers will have at least three weeks) and who it is owed to, as many loans have switched hands to different servicers during the pandemic. 

Once a borrower confirms who their servicer is, it’s a good idea to reach out and determine their options regarding additional relief. Some borrowers may be eligible for extended forbearance or deferment based on economic hardship, unemployment, a change to their income, or other factors. Those in default will need to know specifically what it means to ensure their wages or tax returns are not garnished. 

The Path Forward — How Fintech Can Help

The student loan forbearance period in 2023 was indeed a watershed moment in the world of consumer debt. The return of student loan payments is poised to create a ripple effect across the broader consumer debt landscape, impacting budgets and life plans for many. However, in the face of these challenges, there is hope and an opportunity for individuals to take control of their financial futures with the assistance of fintech innovations. 

By leveraging these technologies, borrowers can navigate the complexities of student loan repayment while still making progress toward their broader financial goals. Student loan refinancing is crucial, enabling borrowers to lower their monthly payments and regain control of their finances. Beyond student loans, the fintech industry provides many alternative financial products that do not entail the same debt obligations, offering flexibility and tailored solutions to meet individual needs.

Moreover, additional services such as earned wage access products can address immediate cash needs, relieving those navigating the post-forbearance landscape. The key takeaway is that borrowers should be prepared, explore their options, and leverage the innovative solutions offered by fintech firms to effectively manage the evolving consumer debt landscape. As we progress, the fintech industry will continue to play a pivotal role in empowering borrowers to achieve greater financial stability and success.