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Three years of relief from payments on $1.6 trillion in student debt allowed for other borrowing and spending — and will shift into reverse.
1225
By Lydia DePillis
Reporting from New York
A bedrock component of pandemic-era relief for households is coming to an end: The debt-limit deal struck by the White House and congressional Republicans requires that the pause on student loan payments be lifted no later than Aug. 30.
By then, after more than three years in force, the forbearance on student debt will amount to about $185 billion that otherwise would have been paid, according to calculations by Goldman Sachs. The effects on borrowers’ lives have been profound. More subtle is how the pause affected the broader economy.
Emerging research has found that in addition to freeing up cash, the repayment pause coincided with a marked improvement in borrowers’ credit scores, most likely because of cash infusions from other pandemic relief programs and the removal of student loan delinquencies from credit reports. That let people take on more debt to buy cars, homes and daily needs using credit cards — raising concerns that student debtors will now be hit by another monthly bill just when their budgets are already maxed out.
“It’s going to quickly reverse all the progress that was made during the repayment pause,” said Laura Beamer, who researches higher education finance at the Jain Family Institute, “especially for those who took out new debt in mortgages or auto loans where they had the financial room because they weren’t paying their student loans.”
The pause on payments, which under the CARES Act in March 2020 covered all borrowers with federally owned loans, is separate from the Biden administration’s proposal to forgive up to $20,000 in student debt. The Supreme Court is expected to rule on a challenge to that plan, which is subject to certain income limits, by the end of the month.
The moratorium began as a way to relieve financial pressure on families when unemployment was soaring. To varying degrees, forbearance extended to housing, auto and consumer debt, with some private lenders taking part voluntarily.
By May 2021, according to a paper from the Brookings Institution, 72 million borrowers had postponed $86.4 billion in loan payments, primarily on mortgages. The pause, whose users generally had greater financial distress than others, vastly diminished delinquencies and defaults of the sort that wreaked havoc during the recession a decade earlier.
But while borrowers mostly started paying again on other debt, for about 42.3 million people the student debt hiatus — which took effect automatically for everyone with a federally owned loan, and stopped all interest from accruing — continued. The Biden administration issued nine extensions as it weighed options for permanent forgiveness, even as aid programs like expanded unemployment insurance, the beefed-up child tax credit and extra nutrition assistance expired.
Student Loan Repayment Dropped Precipitously
Monthly payments received by the Treasury, annualized
Tens of millions of borrowers, who, according to the Federal Reserve, paid $200 to $299 on average each month in 2019, will soon face the resumption of a bill that is often one of the largest line items in their household budgets.
Jessica Musselwhite took on about $65,000 in loans to finance a master’s degree in arts administration and nonprofit management, which she finished in 2006. When she found a job related to her field, it paid $26,500 annually. Her $650 monthly student loan installments consumed half her take-home pay.
She enrolled in an income-driven repayment program that made the payments more manageable. But with interest mounting, she struggled to make progress on the principal. By the time the pandemic started, even with a stable job at the University of Chicago, she owed more than she did when she graduated, along with credit card debt that she accumulated to buy groceries and other basics.
Not having those payments allowed a new set of choices. It helped Ms. Musselwhite and her partner buy a little house on the South Side, and they got to work making improvements like better air conditioning. But that led to its own expenses — and even more debt.
“The thing about having a lot of student loans, and working in a job that underpays, and then also being a person who is getting older, is that you want the things that your neighbors have and colleagues have,” said Ms. Musselwhite, 45. “I know financially that’s not always been the best decision.”
Now the end of the repayment hiatus is looming. Ms. Musselwhite doesn’t know how much her monthly payments will be, but she’s thinking about where she might need to cut back — and her partner’s student loan payments will start coming due, too.
As student debt loads have risen and incomes have stagnated in recent decades, Ms. Musselwhite’s experience of seeing her balance rise instead of sink has become common — 52.1 percent of borrowers were in that situation in 2020, according to an analysis by Ms. Beamer, the higher education researcher, and her co-authors at the Jain Family Institute, largely because interest has accumulated while debtors can afford only minimum payments, or even less.
The share of borrowers with balances larger than when they started had been steadily growing until the pandemic and was far higher in census tracts where Black people are a plurality. Then it began to shrink, as those who continued loan payments were able to make progress while interest rates were set at zero.
A few other outcomes of this extended breather have become clear.
It disproportionately helped families with children, according to economists at the Federal Reserve. A greater share of Black families with children were eligible than white and Hispanic families, although their prepandemic monthly payments were smaller. (That reflects Black families’ lower incomes, not loan balances, which were higher; 53 percent of Black families were also not making payments before the pandemic.)
What did borrowers do with the extra space in their budgets? Economists at the University of Chicago found that rather than paying down other debts, those eligible for the pause increased their leverage by 3 percent on average, or $1,200, compared with ineligible borrowers. Extra income can be magnified into greater spending by making minimum payments on lines of credit, which many found attractive, especially earlier in the pandemic when interest rates were low.
Put another way, the Consumer Financial Protection Bureau found that half of all borrowers whose student loan payments are scheduled to restart have other debts worth at least 10 percent more than they were before the pandemic.
The effect may be most problematic for borrowers who were already delinquent on student loans before the pandemic. That population took on 12.3 percent more credit card debt and 4.6 percent more auto loan debt than distressed borrowers who were not eligible for the pause, according to a paper by finance professors at Yale University and Georgia Tech.
In recent months, the paper found, those borrowers have started to become delinquent on their loans at higher rates — raising the concern that the resumption of student loan payments could drive more of them into default.
“One of the things we’re prepping for is, once those student loan payments are going to come due, folks are going to have to make a choice between what do I pay and what do I not pay,” said David Flores, the director of client services with GreenPath Financial Wellness, a nonprofit counseling service. “And oftentimes, the credit cards are the ones that don’t get paid.”
For now, Mr. Flores urges clients to enroll in income-driven repayment plans if they can. The Biden administration has proposed rules that would make such plans more generous.
Further, the administration’s proposal for debt forgiveness, if upheld by the Supreme Court, would cut in half what would otherwise be a 0.2-percentage-point hit to growth in personal spending in 2023, according to researchers at Goldman Sachs.
Whether or not debt forgiveness wins in court, the transition back to loan repayment might be rocky. Several large student loan servicers have ended their contracts with the Department of Education and transferred their portfolios to others, and the department is running short on funding for student loan processing.
Some experts think the extended hiatus wasn’t necessarily a good thing, especially when it was costing the federal government about $5 billion a month by some estimates.
“I think it made sense to do it. The real question is, at what point should it have been turned back on?” said Adam Looney, a professor at the University of Utah who testified before Congress on student loan policy in March.
Ideally, the administration should have decided on reforms and ended the payment pause earlier in a coordinated way, Dr. Looney said.
Regardless, ending the pause is going to constrain spending for millions of families. For Dan and Beth McConnell of Houston, who have $143,000 left to pay in loans for their two daughters’ undergraduate educations, the implications are stark.
The pause in their monthly payments was especially helpful when Mr. McConnell, 61, was laid off as a marine geologist in late 2021. He’s doing some consulting work but doubts he’ll replace his prior income. That could mean dropping long-term care insurance, or digging into retirement accounts, when $1,700 monthly payments start up in the fall.
“This is the brick through the window that’s breaking the retirement plans,” Mr. McConnell said.
Lydia DePillis is a reporter on the Business desk who covers the changing American economy and what it means for peoples’ lives. @lydiadepillis
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FAQs
Student Loan Pause Is Ending, With Consequences for Economy? ›
WASHINGTON -- The Supreme Court's decision striking down President Joe Biden's program to forgive student loan debt for about 43 million people could hurt not just individual borrowers, but also the U.S. economy, as billions of dollars of consumers' disposable income are taken out of circulation.
Will student loan forgiveness hurt economy? ›WASHINGTON -- The Supreme Court's decision striking down President Joe Biden's program to forgive student loan debt for about 43 million people could hurt not just individual borrowers, but also the U.S. economy, as billions of dollars of consumers' disposable income are taken out of circulation.
How does student loan pause affect economy? ›When required payments on federally-held student loans resume this September, borrowers will have $5 billion a month less to spend on other things, putting stress on an economy already facing the prospect of a recession.
What will happen to economy when student loans resume? ›Resuming student loan payments will cost U.S. consumers $18 billion a month, the investment firm Jefferies has estimated. The hit to household budgets is ill-timed for the overall economy, Jefferies says, because the United States is widely believed to be on the brink of a recession.
Why did the Supreme Court oppose student loan forgiveness? ›In the opinion, delivered by Chief Justice John Roberts, the court found that the debt forgiveness plan would “cut into Mohela's revenue, impairing its effort to aid Missouri college students”.
How student loan forgiveness will affect inflation from economists? ›Similarly, Mark Zandi, Moody's Analytics chief economist, says the effect on inflation is “largely a wash.” He estimates that student debt forgiveness starting at $10,000 will increase inflation by 0.08%, as measured by the consumer price index (CPI), another commonly used measure of inflation.
What is the downside of student loan forgiveness? ›Potentially the most significant drawback of student loan forgiveness is the taxes. With a few exceptions, including PSLF, the IRS considers the amount of your forgiven balance to be taxable income. Depending on how much is forgiven, that could amount to tens of thousands of dollars you owe in taxes.
Do student loans adjust for inflation? ›If you're lucky enough to get a raise due to inflation, you should also know that the monthly payment on your federal student loans could rise as a result.
How will student loans affect my future? ›Student loan debt affects more than your financial independence and your standard of living. It also determines which dreams you're able to pursue and which ones will become a distant memory. You may find yourself sacrificing a job that offers you more fulfillment and purpose for a career with a higher salary.
Why is student loan debt bad? ›Default Can Lead to Serious Consequences
If you default on your student loan payments, it can have a devastating impact on your credit score, making it harder to obtain other forms of credit when you need them. Additionally, debt collectors may add expensive fees, increasing the amount you owe.
Who ruled against student loan forgiveness? ›
On Friday, the Supreme Court struck down Biden's plan to cancel up to $20,000 of student debt per person owed to the federal government, ruling in a 6-3 decision along ideological lines that the president could not use emergency “waiver” powers tied to the Covid-19 pandemic to implement massive debt forgiveness.
What justices voted against student loan forgiveness? ›The court's three liberal voices — Justices Elena Kagan, Sonia Sotomayor and Ketanji Brown Jackson — all opposed the decision.
How soon will the Supreme Court rule on student loan forgiveness? ›The U.S. Supreme Court on the last day of the term blocked President Joe Biden's student debt forgiveness plan. The court generally releases most of its opinions by the end of June.
Is student loan a market failure? ›This is a market failure—there are good investments to be made, but private lenders cannot or are reluctant to make these loans, just as they are reluctant to make (and therefore demand higher interest rates for) other unsecured loans, such as credit cards.
What are the benefits of paying student loans during pause? ›If you make student loan payments during the pause, all the money goes toward reducing the principal. This will help you reduce your debt more quickly than when you're in a regular repayment period because you'll be paying interest on a smaller amount of debt when payments resume.
Why should student loans be reduced? ›Student loan debt is slowing the national economy. Forgiveness would boost the economy, benefiting everyone. Student loan debt slows new business growth and quashes consumer spending.
What causes inflation? ›More jobs and higher wages increase household incomes and lead to a rise in consumer spending, further increasing aggregate demand and the scope for firms to increase the prices of their goods and services. When this happens across a large number of businesses and sectors, this leads to an increase in inflation.
What is the average amount of student loan debt? ›The average federal student loan debt is $37,338 per borrower. Private student loan debt averages $54,921 per borrower. The average student borrows over $30,000 to pursue a bachelor's degree.
Why is inflation bad? ›In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.
Who benefits more from student loan forgiveness? ›According to the CFRB, “57 percent to 65 percent of the extended pause and cancellation will go to those in the top half of the income spectrum.” Even assuming full participation across incomes, highest earners still reap the most financial reward.
Would forgiving student loans make inflation worse? ›
Student loan forgiveness is unlikely to impact inflation.
Why student loan forgiveness is good for everyone? ›People whose payments are cut or eliminated should have more money to spend elsewhere – maybe to buy a car, put a down payment on a house or even put money aside for their own kids' college savings plan. So the debt forgiveness has the potential to raise the living standard for tens of millions of people.
Should I pay off debt during high inflation? ›Prioritize paying down high-interest debt
If you have any credit card debt, that debt will increase at a higher rate, and become more expensive over time. Avoid that extra expense by taking steps to pay down any credit card debt you might have, and pay off your balance each month if you can.
However, it's important to note that the potential additional profit may be canceled due to the same factor: inflation. In other words, lenders may be hurt by inflation because they are paid back in money that has less purchasing power than the money they initially loaned out.
Is student loan moratorium causing inflation? ›While this line has been parroted in the opinion sections of mainstream news outlets, it's empirically unfounded. Here's the data: Independent analysts have estimated that each full-year moratorium on student debt adds only “about 0.2 percentage points to inflation,” and White House projections are even lower.
What are 5 major problems with taking out student loans? ›- LACK OF PERSPECTIVE GOING INTO COLLEGE. ...
- DIRECTIONS CHANGE AFTER GRADUATION. ...
- LACK OF STUDENT LOAN EDUCATION. ...
- LACK OF PERSONAL FINANCE KNOWLEDGE. ...
- WHAT WORKED 30 YEARS AGO DOESN'T WORK TODAY.
Data Summary. As of 2022, 43.5 million Americans have federal student loans. Approximately 13% of all Americans had federal student loan debt in 2021.
How do student loans impact getting a mortgage? ›Student loans don't affect your ability to get a mortgage any differently than other types of debt you may have, including auto loans and credit card debt.
Why is US student debt so high? ›Students are generally borrowing more because college tuition has grown many times faster than income. The cost of college—and resulting debt—is higher in the United States than in almost all other wealthy countries, where higher education is often free or heavily subsidized.
Which is worse credit or student loan debt? ›As the credit card debt is higher interest and you carry a large balance on it, that debt is usually costing you more than your student loans.
Is student debt bad for the economy? ›
Among the economic benefits of student loans is that they allow more people to get a higher education. But there are definitely negative effects of student loans as well, including tamping down spending and dragging on overall growth.
Has anyone ever forgiven their student loans? ›U.S. Department of Education Announces $42 Billion in Approved Public Service Loan Forgiveness for More Than 615,000 Borrowers Since October 2021.
Can we forgive all student loans? ›The answer: Yes! However, there are very specific eligibility requirements you must meet to qualify for loan forgiveness or receive help with repayment. Loan forgiveness means you don't have to pay back some or all of your loan.
Did the Supreme Court overturn student loan forgiveness? ›Here's what to know about the ruling. Washington — The Supreme Court on Friday invalidated President Biden's student loan forgiveness plan, ruling that a 2003 federal law does not allow the program to wipe out nearly half-a-trillion dollars in debt.
What does the Supreme Court decision on student loans mean? ›Politics Jun 30, 2023 1:29 PM EDT. NEW YORK (AP) — The Supreme Court has ruled the Biden administration overstepped its authority in trying to cancel or reduce student loan debt, effectively killing the $400 billion plan, which would have canceled up to $20,000 in federal student loans for 43 million people.
Did Supreme Court block student loan? ›In a stinging defeat for President Joe Biden, the Supreme Court blocked the administration's student loan forgiveness plan Friday, rejecting a program aimed at delivering up to $20,000 of relief to millions of borrowers struggling with outstanding debt.
How does student loan forgiveness work? ›Forgiveness eligibility requires 25 years of qualifying payments. Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE): Maximum monthly payments will be 10% of discretionary income. Forgiveness eligibility requires 20 years of qualifying payments. The government may even pay part of the interest on the loan.
Is student loan forgiveness helpful? ›A recent CNBC survey found that more than half of respondents would pay off other loans if student loans were canceled, and 45 percent would save for retirement. In the end, student loan cancellation will make it easier for households to manage their budgets and save for their future.
What happens if we forgive student loans? ›If you qualify for student loan forgiveness or discharge in full, you will get a notification and will no longer need to make payments. In some cases, you may even get a refund. If only some of your debt is canceled or discharged, you'll still be responsible for repaying the rest of what you owe.
Will the student loan forgiveness lower my payment? ›If you get $10,000 in student loan forgiveness, your total balance would be reduced by a third, and your monthly payment will also drop by a third, to roughly $210 a month. Your repayment timeline remains the same as before.
Is it true that student loans can be forgiven? ›
The answer: Yes! However, there are very specific eligibility requirements you must meet to qualify for loan forgiveness or receive help with repayment. Loan forgiveness means you don't have to pay back some or all of your loan.
Will student loan forgiveness cause inflation? ›Student loan forgiveness is unlikely to impact inflation.
Who profits from student loans? ›Student loans are owned by the federal government or private institutions, depending on the type of student loan. Federal student loans are owned by the U.S. Department of Education while private student loans are owned by the financial institution that granted them.
Who benefits from student loan forgiveness? ›In August 2022, Education Secretary Miguel Cardona announced steps to eliminate or reduce debt burdens for millions of student borrowers. The plan was targeted at those who need relief the most, with nearly 90% of those likely to receive debt relief earning less than $75,000 per year.
Is it ethical to forgive student loans? ›Canceling debt also seems to violate the moral principle of following through on one's promises. Borrowers have a moral duty to fulfill their loan agreements, the philosopher Immanuel Kant argued, because reneging on promises is disrespectful to oneself and others.
What does Biden want to do with student loans? ›President Joe Biden introduced the plan in two 2022 to cancel up to $20,000 in federal student debt. But borrowers are holding their breath after the plan was put on hold while it moves through the courts, it's now up to the Supreme Court to settle the program's legality is hope on the horizon.
Should I just pay off my student loans or wait for forgiveness? ›Student loan forgiveness amounts are considered taxable income by the IRS. The taxes you may have to pay on the forgiven amount may be more than you would want to pay. In that case, it is probably in your best interest to pay off your student loans as soon as you can if you have the financial means to do so.
Can credit card debt be forgiven? ›Credit cards are another example of a type of debt that generally doesn't have forgiveness options. Credit card debt forgiveness is unlikely as credit card issuers tend to expect you to repay the money you borrow, and if you don't repay that money, your debt can end up in collections.
Is Biden paying off student loans? ›The Supreme Court rejected President Joe Biden's plan to wipe away $400 billion in student debt, and while the president is pledging to take another route to fulfill his campaign promise, Friday's hearing leaves millions of current and former students in limbo.
Which student loans will be forgiven automatically? ›“Any borrowers with loans that have accumulated eligible time in repayment of at least 20 or 25 years will see automatic forgiveness, even if they are not currently on an IDR plan,” says updated Education Department guidance. Some borrowers will need to take other steps to benefit from the program.
Do student loans go away after 7 years? ›
If the loan is paid in full, the default will remain on your credit report for seven years following the final payment date, but your report will reflect a zero balance. If you rehabilitate your loan, the default will be removed from your credit report. Q.