A cornerstone of pandemic-era household salvation is coming to an end. A debt-restriction pact signed by the White House and Republicans in Congress requires that the moratorium on student loans be lifted by August 30 at the latest.
Goldman Sachs estimates that by more than three years into law, student loan forgiveness will amount to about $185 billion that would otherwise have been paid. The impact on borrowers’ lives is severe. More subtle is how the moratorium affected the economy as a whole.
A new study found that, in addition to releasing cash, the suspension of payments coincided with a noticeable improvement in borrowers’ credit scores. This is likely due to cash injections from other pandemic relief programs and the removal of student loan delinquencies from credit reports. This will allow people to use their credit cards to borrow more to buy cars, homes and groceries, and student debtors will be able to pay for new monthly bills when their budgets are already stretched to the limit. Concerns about being hit with charges are growing.
“All the progress made during the moratorium will be quickly reversed,” said Laura Beemer, a researcher in higher education finance at the Jain Family Institute. It’s the same for people who have taken out new debt with loans,” he said. They weren’t paying their student loans, so they went to the finance office. “
The moratorium on all federally-owned loan borrowers under the March 2020 CARES Act is separate from the Biden administration’s proposal to forgive up to $20,000 in student loans. The Supreme Court is due by the end of this month to rule on the challenge to the plan, which is subject to certain income limits.
The moratorium began as a means of relieving financial pressure on families when unemployment soared. To a lesser extent, tolerance extended to housing, autos and consumer debt, with some private financiers voluntarily participating.
By May 2021, according to Brookings Institution paper, 72 million borrowers had deferred $86.4 billion in loan payments, mostly mortgages. The suspension, which generally caused more financial hardship than other users, has significantly reduced delinquencies and defaults that wreaked havoc during the recession a decade ago.
But while most of the borrowers began paying off other debts again, Approximately 42.3 million people Suspending Student Loans — Automatically enabled Covered everyone with federally owned loans and stopped accruing all interest – continued. The Biden administration has explored permanent exemption options and announced nine extensions, even as support programs such as expanded unemployment insurance, enhanced child tax credits and additional nutritional assistance have expired. .
Tens of millions of borrowers According to the Federal ReserveThose who paid an average of $200 to $299 per month in 2019 will soon be faced with the return of bills, often one of the largest items in their household budget.
Jessica Musselwhite received a loan of about $65,000 to complete her master’s degree in arts administration and non-profit management in 2006. When she found a job related to her field, she was paid $26,500 a year. Month after month she used up half of her take home pay in student loan installments of $650.
She enrolled in an income-based repayment program to make her payments more manageable. However, due to her increased interest, she struggled to repay the principal. By the time her pandemic began, even though she had a stable job at the University of Chicago, she was in more debt than when she graduated, and had to buy her groceries and other necessities. Credit card debt was also piling up.
Eliminating those payments has opened up new options. This has allowed Musselwhite and his partners to purchase a small home on the South Side and work on improvements such as better air conditioning. However, this resulted in expenses and increased debt.
“It’s about having a lot of student debt, getting a low-paying job, and getting older and wanting what your neighbors and co-workers have,” Musselwhite said. 45. “Financially, I know it’s not always the best decision.”
The end of the grace period is approaching. Musselwhite doesn’t know what his monthly payments will be, but he’s thinking about where he needs to cut. And your partner’s student loan payments begin.
In recent decades, Musselwhite’s experience of growing rather than shrinking balances has become commonplace as student loan burdens rise and incomes stagnant, with a study predicting 2020. said 52.1 percent of borrowers were in such situations. analysis A study by Ms. Beemer, a higher education researcher, and her co-authors at the Jain Family Institute found that interest is accumulating mainly despite debtors being able to pay the minimum or even less. cause.
The percentage of borrowers with higher balances than they had at the start increased steadily until the pandemic, and was much higher in black-majority Census districts. Then its size began to shrink as those who continued to make loan payments while interest rates were set at zero were able to make progress.
Several other consequences of this extended rest have become apparent.
It unduly helped families with children, According to Federal Reserve Economists. Black families with children were more likely to be covered than white or Hispanic families, but paid less per month before the pandemic. (This reflects lower incomes for black households, not higher loan balances, as 53 percent of black households were not paying before the pandemic.)
What did borrowers do with the extra space in their budget? University of Chicago economist found Instead of paying off other debts, those subject to the suspension increased their leverage by an average of 3%, or $1,200, compared to non-eligible borrowers. Making a minimal payment on a line of credit that allows you to spread your additional income into a larger expense appealed to many, especially when interest rates were low early in the pandemic.
In other words, the Consumer Financial Protection Bureau found Half of the borrowers whose student loans are due to start resuming have other debts worth at least 10 percent more than they were before the pandemic.
The impact could be most problematic for borrowers who were already behind on their student loans before the pandemic. According to one report, these people had 12.3% more credit card debt and 4.6% more car loan debt than needy borrowers who were not subject to the suspension. Papers by professors of finance at Yale University and Georgia Tech.
In recent months, those borrowers have started to fall behind on high-interest loans, the Times said, raising fears that resuming student-loan payments could cause more borrowers to default.
“One of the things we are prepared for is that when student loans come due, people will have to choose what to pay and what not to pay,” said David. Flores said. He is a client of GreenPath Financial Wellness, a non-profit counseling service. He is the Director of Services. “And a lot of the time it’s the credit cards that don’t accept payments.”
For now, Flores encourages customers to sign up for an income-based repayment plan when possible. The Biden administration proposed rule Then such a plan would be more generous.
Moreover, if the administration’s debt forgiveness proposal were upheld by the Supreme Court, it would cut consumer spending growth by 0.2 percentage points in 2023, cutting it in half, according to Goldman Sachs researchers. .
Whether debt forgiveness wins in court or not, getting back to paying the loans can be tough. Some of the major student loan service companies terminated the contract Working with the Department of Education and transferring its portfolio to others, the department lack of funds For processing student loans.
Some experts believe the extended hiatus wasn’t necessarily a good thing, especially considering it cost the federal government about $5 billion a month. Several Estimate.
“I think it made sense to do that. The real question is, at what point did you have to turn the switch back on?” testified before Congress About the student loan policy in March.
Dr. Rooney said ideally the administration should have decided to reform and end the suspension of payments early in a coordinated manner.
Either way, ending the moratorium would limit spending for millions of families. Dan McConnell and Beth McConnell, who live in Houston, have been hit hard because they have $143,000 in outstanding loan payments for their two daughters’ undergraduate education.
The suspension of monthly payments was especially helpful when McConnell, 61, was laid off as a marine geologist in late 2021. He has a consulting job, but he doesn’t see it as a replacement for his previous income. That could mean scrapping long-term care insurance or digging into retirement accounts when $1,700 monthly payments start in the fall.
“It’s the brick out the window that smashes retirement plans,” McConnell said.
