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The COVID-19 pandemic sent the U.S. economy into a short but drastic recession, generating a wave of layoffs and business closures. But a new analysis found that the first seven months of the pandemic actually ended with fewer Iowans delinquent on credit card and student loan debts.
“I think it really shows us how, in a relatively short period, with a little break, people can really get their financial situation back on track,” said Nick VinZant, a senior research analyst with QuoteWizard.
QuoteWizard, a subsidiary of LendingTree that offers insurance comparison shopping, used data from the Urban Institute to analyze how individuals’ debt changed in the early months of the COVID-19 pandemic. Iowa saw significant decreases in the number of people who were delinquent on either student loans or credit card debt.
In Iowa, 14% of people were delinquent on their student loan payments in February 2020 — meaning they had not paid in 60 days or more. By October 2020, just 9% of people were delinquent. Iowa saw the 9th largest drop in that time period, analysts found.
“In just an eight months span, you had 20,000 people (in Iowa) that were able to catch up on their student loan payments,” VinZant said. He noted that those 20,000 did not fully pay off their loans in the time period — they just were no longer behind on their payments.
Ty Patton, communications coordinator for Iowa College Aid, said the state observed a similar phenomenon in the number of Iowans who defaulted on their student loans. About 7% of graduates from the Class of 2018 defaulted on their loans in the first three years after graduating. That’s a decrease from the Class of 2017, which had a 9.3% default rate within the first three years, and from every class since 2009, which had a default rate of 10% or higher.
VinZant pointed to several factors that might explain the change. First, the federal government sent out a first stimulus check in April 2020, giving people an extra $1,200 that could go toward unpaid debts. The U.S. Department of Education also temporarily suspended federal student loan repayments beginning in March 2020.
“The third thing is that, with lockdowns in place, people really didn’t have things to spend their money on,” VinZant said. “They weren’t traveling, they weren’t eating out, they weren’t really going places.”
The same factors — the student loan repayment freeze, stimulus checks and lockdowns — could also explain a drop in credit card delinquency, according to VinZant. In February, 9% of Iowans were delinquent on credit card debt, meaning they had not completed a credit card payment in 30 days or more. By October, just 3% of Iowans were delinquent.
Patton said Iowa College Aid analysts believed the moratorium on student loan payments caused the lower default rate for the Class of 2018. But he warned that the effects may not last.
“The major concern is when that moratorium ends, how will borrowers resume paying their loans and budgeting appropriately to do so,” Patton wrote in an email. “It may be further exacerbated by many federal loans changing servicers during this period, creating some confusion as to who the borrowers should be paying.”
VinZant said it was too soon to know how debt delinquency rates changed between October 2020 and now, but he anticipated that people continued to catch up on their missed payments, even if at a slightly slower rate.
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