An Interesting Wrinkle in Student Debt Fears

Student loan delinquencies are back. Not that they ever went away, but now they are really back. With the government’s moratorium over, delinquencies began showing up on credit reports in Q1 2025. Interestingly, we haven’t seen much chatter about the broader macroeconomic implications tied to them—a stark contrast to prepandemic times and evidence of how this previously common, false fear evolved.

For a refresher on the US student loan market, over 90% of student loans are government-owned, after the effective nationalization of them in 2010.^[i] Later, in response to the pandemic, the government’s emergency moratorium paused payments until September 1, 2023. Though payment requirements resumed then, the Biden administration provided a 12-month “on-ramp period,” which meant late, partial or missed payments weren’t reported to the three national credit bureaus. That grace period expired on September 30, 2024. Delinquencies have since started appearing on credit reports.

According to the New York Federal Reserve’s latest Household Debt and Credit Report sourced partly from the credit bureaus, 23.7% of student loan borrowers were behind on their payments in Q1, higher than the 22.1% in Q1 2020 (when the moratorium took effect).^[ii] Unsurprisingly, with the on-ramp period over, seriously delinquent debt (90+ days past due) jumped from less than 1% in Q4 2024 to 7.7% last quarter.^[iii] Some mainstream financial outlets picked up on the news, worrying about renewed pressures (from falling behind on other payments to potential wage garnishment later this summer) facing borrowers. A handful of pieces cast it as a potential headwind to consumer spending.

But those were few and far between. In contrast to prior years, the conventional analysis isn’t arguing that student loan delinquencies are likely to pack a cyclical economic punch. Student debt delinquencies rose in the aftermath of the global financial crisis, and many presumed that trouble would spill over into the broader economy. Before the pandemic, this concern garnered headlines regularly. For example, according to the Pew Research Center in 2014, student debtor households were accumulating less wealth because of their payment obligations—making it harder for them to start their adult lives, with attendant effects on consumption and economic growth.^[iv] The year prior, a prominent economist argued student debt was “crushing the American Dream” by weighing on consumption and dissuading households from buying homes and starting families.^[v] As far back as 1997, news outlets worried college students’ expanding student debt loads were “affecting their ways of life and job choices.”^[vi]

In our view, these arguments are mostly sociological. We agree the pursuit of higher education is an economic decision that can affect other choices. Those who borrow heavily to go to college to get an advanced degree may not feel comfortable financially to buy a home or have children—and, if widespread, that trend could have political and societal implications.

But tying this to economic growth trends presumes home ownership and having kids are huge spending drivers carrying vast cyclical impact. Not so. In reality, they merely redirect spending. Borrowers don’t stop living because they have student debt to service. Rather, their spending goes to different categories. For instance, instead of mortgage payments and diapers, their income goes to rent and perhaps a gym membership. If student debt delinquencies were problematic for the broader economy, why did real consumer spending keep chugging along in the 2010s despite a jump in seriously delinquent loans in the earlier part of the decade? (Exhibit 1)

Exhibit 1: Delinquent Student Loan Borrowers Don’t Hurt Broader Spending

Source: FactSet and the Federal Reserve Bank of New York, as of 5/21/2025. Quarterly change in real PCE (annualized) and percent of balance 90+ days delinquent (student loans), Q1 2003 – Q1 2025.

It is as if people worried about possible fallout on economic growth when that feared outcome was in the distant future, years down the line. Now that reality is here, the fear shifted away. It now rests on pure sociological effects. Even those tying higher delinquencies to consumer spending pressures don’t center their argument on this. It tends to be buried in the discussion, almost an afterthought.

Past ghosts may yet return, but today’s casting of them as sociological issues above cyclical economic concerns seems a lot more sensible to us. To be clear, we don’t dismiss some borrowers’ student debt burden. Some may suffer financial hardships, particularly those who took on a lot of debt for advanced degrees that didn’t offer commensurate earnings prospects, those who didn’t complete their degree or, perhaps, those still early in their careers. Those types of examples frequently feature in news coverage, but they aren’t reflective of a more mundane, common experience. One, student debt is a small slice of total US household debt. As of Q1, student debt totaled about $1.63 trillion (relative to $18.2 trillion in total US household debt), and just $120.62 billion (7.4%) was seriously delinquent.^[vii] $120 billion is nothing to sneeze at, but student loan delinquency rates were higher in the early 2010s—and they didn’t trip up the US economy then.

Two, most borrowers don’t actually face an overwhelming financial burden. Of the 43.7 million borrowers (as of Q4 2024, the latest numbers from the NY Fed), around 58% owe a balance of $25,000 or less—with an average monthly payment of around $300.^[viii] That is akin to a car payment. Borrowers with the largest outstanding balances ($200,000+) were just 2.3% of the total.^[ix]

Sure, most borrowers would likely prefer to put their student loan payments to other types of spending—saving, paying down other debt and/or making a fun purchase. But from a macroeconomic perspective, student loan debt isn’t a looming hidden threat to the US economy—a reality more appear to recognize today.