Repayment histories for borrowers in low and middle-income areas have been improving during the pandemic-era economy, albeit with a lot of help from Uncle Sam, according to the latest report in “The State of Low-Income America: Credit Access and Debt Payment” published by the Federal Reserve Bank of New York.
The new report acknowledged that the positive changes in repayment performance came with assistance from policies put into place when Covid-19 shut down most of the U.S. economy.
“Borrowers benefited substantially from the federal government”™s fiscal transfers and debt-related payment moratoria, and many saw increases to their credit scores despite the recession,” the report stated. “This was particularly the case for lower-income borrowers, who were more likely to be delinquent before the pandemic. Fiscal transfers came in the form of both additional cash in the pockets of most Americans, while forbearance participants were able to pause repayment on their debt obligations.”
The report observed that auto and student loan balances were comparable between borrowers in low-income areas and those residing in wealthier areas. A greater disparity was measured in mortgage debt, with wealthier borrowers carrying a greater financial burden, if only because home loans were rarer among the low-income borrowers. Credit card debt is the most commonly held debt across all income groups, even though only half of low-income households can claim access to a credit card.
Bankruptcies have declined substantially since the onset of the pandemic, the report noted, which is good news for the lower-income areas where bankruptcy filings have historically been more prevalent.
Student loan debt continued to be a challenge, although the report observed that most student loans were eligible for emergency relief under the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which resulted in a pausing of loan repayments (including the collection of defaulted loans) through May 1, 2022. Default rates on student loans have traditionally been negatively related to area income, with lower-income metropolitan areas carrying higher levels of student loan defaults.
“The share of borrowers in default declined during the pandemic due to the repayment pause on student loans, as some borrowers have been able to exit default while payments were paused,” the report said. “Default rates are more than three times higher among borrowers in low- and moderate-income areas than in high-income areas. This is even the case in the pandemic era, when loan rehabilitation has been easier during the payment pause.”
The report noted that all income groups recorded a rise in median credit scores during the pandemic, while borrowers with student loans witnessed a sharper increase in their credit scores compared to borrowers without student loans ”” this can be partly attributed to the younger age profile of student loan borrowers.
“While student loan payments are paused, federal borrowers have been marked current on their credit reports,” the report continued. “This temporary removal of delinquencies lifted the credit scores of previously delinquent borrowers, particularly in the low- and middle-income areas where delinquency and default were higher pre-pandemic.”
Nonetheless, the report noted that its data concluded prior to the expiration of many federal programs designed to assist Americans during the pandemic, and there is no guarantee that the positive data trends can continue without Washington”™s assistance. The report warned that the “improvements on credit reports achieved by the relief may disguise underlying vulnerabilities when all support programs have ended, and consumers have used up the additional savings accumulated over the last year.”
The report sourced its data from the New York Fed”™s Consumer Credit Panel, which is derived from anonymized Equifax credit data; credit report statistics are culled from income data with the federal government”™s American Community Survey. The definitions of low- and moderate-income levels are taken from the Federal Financial Institutions Examination Council, with a lower-income neighborhood defined as a census tract in which the median family income is less than 80% of the metro area median income.
