Student loan pause is coming to an end, with consequences for the economy

A fundamental part of pandemic-era household relief is coming to an end: The debt limit deal brokered by the White House and Republicans in Congress requires the pause on student loan payments to be lifted by Aug. 30.

By then, after more than three years in effect, the student debt forgiveness will amount to about $185 billion that would otherwise have been paid, according to calculations by Goldman Sachs. The impact on borrowers’ lives has been profound. More subtle is how the break affected the wider 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 due to cash infusions from other pandemic relief programs and the removal of student loan delinquencies from credit reports. This has allowed people to take on more debt to buy cars, homes and daily necessities with credit cards – raising concerns that student debtors are now being hit with another monthly bill just when their budget is already maxed out.

“It will quickly reverse any progress made during the loan repayment period,” says Laura Beamer, who researches higher education financing at the Jain Family Institute, “especially for those who have taken on new debt in mortgages or car loans where they had the financial room because they did not pay their student debt.”

The payment hiatus, which covered all borrowers with federal loans under the CARES Act in March 2020, is separate from the Biden administration’s proposal to forgive up to $20,000 in student debt. The Supreme Court is expected to rule by the end of the month on an objection to that plan, which is subject to certain income limits.

The moratorium began as a way to ease the financial strain on families as unemployment soared. To varying degrees, tolerance extended to housing, auto and consumer debts, with some private lenders participating voluntarily.

By May 2021, according to a paper from the Brookings Institution, 72 million borrowers had deferred $86.4 billion in loan payments, primarily on mortgages. The break, whose users generally had more financial problems than others, saw a huge reduction in delinquencies and defaults of the sort that wreaked havoc during the recession a decade earlier.

But while borrowers usually started paying back on other debts, for about 42.3 million people the student loan break – which one entered into force automatically for anyone with a loan owned by the federal government, and stopped all interest accrual – continued. The Biden administration issued nine extensions as it weighed options for permanent forgiveness, even as relief programs such as expanded unemployment insurance, the enhanced child tax credit and additional nutritional aid expired.

Tens of millions of borrowers, who, according to the Federal Reservethose who paid an average of $200 to $299 per month in 2019 will soon face the resumption of a bill that is often one of the largest items in their household budget.

Jessica Musselwhite took out about $65,000 in loans to fund a master’s degree in arts administration and nonprofit management, which she completed in 2006. When she found a job related to her field, it paid $26,500 annually. Her $650 monthly student loans consumed half of her take-home pay.

She enrolled in an income-driven repayment program that made payments more manageable. But with increasing interest, she struggled to make headway with the principal. By the time the pandemic started, even with a steady job at the University of Chicago, she was more in debt than she was when she graduated, along with credit card debt she had accumulated to buy groceries and other basic necessities.

Not having those payments created a new set of choices. It helped Mrs. Musselwhite and her partner buy a cottage on the south side, and they set about making improvements, such as better air conditioning. But that led to his own spending — and even more debt.

“The problem with having a lot of student loans, working in a job that is underpaid, and then also being someone who is getting older is you want the things that your neighbors have and colleagues have,” said Ms Musselwhite, 45. “I know financially that this wasn’t always the best decision.”

Now the end of the repayment break is in sight. 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 loans will have to be paid, too.

As student debt has risen and incomes have stagnated in recent decades, Ms Musselwhite’s experience of seeing her balances rise rather than see them become normal – 52.1 per cent of borrowers were in that situation in 2020 , according to a analysis by Ms. Beamer, the higher education researcher, and her Jain Family Institute co-authors, largely because interest has accrued while debtors can only pay minimum payments, if not less.

The proportion of borrowers with larger balances than when they started had been growing steadily until the pandemic and was much higher in censuses where black people are a multiple. Then it started to shrink, as those who continued to pay off loans were able to make progress while interest rates were set to zero.

A few other outcomes of this extended pause have become apparent.

It has disproportionately helped families with children, That’s what economists at the Federal Reserve say. A higher proportion of black families with children were eligible than white and Hispanic families, although their prepandemic monthly payments were lower. (That reflects lower incomes of black families, not loan balances, which were higher; 53 percent of black families also failed to pay before the pandemic.)

What did borrowers do with the extra room in their budget? Economists at the University of Chicago found it that those who qualified for the break instead of paying off other debts increased their leverage by an average of 3 percent, or $1,200, compared to non-eligible borrowers. Additional income can be magnified into larger expenses by making minimal payments on lines of credit, which many have found attractive, especially early in the pandemic when interest rates were low.

In other words, the Consumer Financial Protection Bureau found it that half of all borrowers whose student loans are due to be repaid have other debts worth at least 10 percent more than 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 car loans than distressed borrowers who didn’t qualify for the break, according to a survey. paper by finance professors at Yale University and Georgia Tech.

In recent months, the paper found, those borrowers have fallen behind on their loans at higher rates — raising concerns that the resumption of student loan payments could cause more of them to default.

“One of the things we’re preparing for is that people will have to make a choice between what I will and won’t pay once those student loans come due,” said David Flores, the director of customer service at GreenPath Financial Wellness, a not-for-profit advisory service. “And often it’s the credit cards that don’t get paid.”

For now, Mr. Flores is urging clients to enroll in income-related repayment plans when possible. The Biden administration has proposed rules that would make such plans more generous.

Further, the government’s proposal for debt cancellation, if upheld by the Supreme Court, would cut personal spending growth in half by 2023, according to Goldman Sachs researchers, from what would otherwise be a 0.2 percentage point hit.

Whether the debt forgiveness wins in court or not, the transition to loan repayment can be difficult. Several large student loan managers have terminated their contracts with the Ministry of Education and their portfolios transferred to others, and the department is funding is lacking for student loan processing.

Some experts think the extended hiatus wasn’t necessarily a good thing, especially since it cost the federal government about $5 billion a month through some estimates.

“I think it made sense to do it. The real question is, at what point should it have 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 in a coordinated way and ended the payment pause earlier, Dr. Looney said.

Either way, ending the pause will limit spending for millions of families. For Dan and Beth McConnell of Houston, who have $143,000 left to pay on loans for their two daughters’ undergraduate education, the implications are profound.

The break in their monthly payments was particularly helpful when Mr McConnell, 61, was laid off as a marine geologist at the end of 2021. He does some consulting work, but doubts that he will replace his previous income. That could mean cutting long-term care insurance or digging into retirement accounts when monthly payments of $1,700 begin in the fall.

“This is the brick through the window that breaks retirement plans,” said Mr. McConnell.