Student Loan

The COVID-19 pandemic has wreaked havoc on the economy, and student loan borrowers have not been immune to its effects. The federal government suspended student loan payments in March 2020 in response to the pandemic, providing relief to millions of borrowers. However, this temporary suspension is set to expire at the end of January 2022, which means that the clock is ticking for those who owe student loan debt. This restart in payments raises some critical questions about the impact on the economy and borrowers’ long-term financial stability. In this post, we will explore what this looming deadline means for student loan borrowers and the broader economy.

1. Student loan payments restart soon

Student loan borrowers are facing the countdown as monthly payments are set to restart soon. The U.S. Department of Education has warned that borrowers should be prepared for payments to resume 60 days after the Supreme Court announces its decision on the Biden administration’s student loan forgiveness plan. Higher education expert Mark Kantrowitz predicts that the most likely scenario is monthly payments restarting in September. The restart of payments will incur extra financial stress for millions of Americans, especially for those who are still struggling financially due to the pandemic. Borrowers are advised to review affordable repayment options and have a plan in place if they cannot make payments.

2. The impact on the economy

The student loan payments are expected to have a modest impact on the economy. According to Goldman Sachs analysts, there will be a drag on spending this year, regardless of how the Supreme Court rules on President Biden’s debt forgiveness plan. However, the end of the student loan payment pause is predicted to outweigh any boost to consumption from the forgiveness plan. On the other hand, some experts warn that the extra financial stress faced by Americans may lead to a downturn. Borrower advocates have expressed their concerns about the issue, pointing out that the vast majority of borrowers have not yet fully recovered from the impact of the pandemic. While middle-income households would benefit the most from a debt forgiveness plan, the restart of student loan payments is likely to increase student debt payments by 0.3% of disposable personal income, creating a drag on spending.

3. Goldman Sachs’ prediction

According to Goldman Sachs analysts, the restart of monthly payments for student loan borrowers in September will result in a modest drag on spending this year, regardless of how the Supreme Court rules on President Biden’s debt forgiveness plan. The end of the student loan payment pause will likely offset any boost to consumption from the forgiveness plan in the long run. The researchers estimate that the restart of payments will increase student debt payments by 0.3% of disposable personal income, which will create a drag on spending, reducing personal consumption expenditure growth by 0.2 percentage points this year if forgiveness is denied. However, if forgiveness is upheld, repayments will only lower PCE growth by 0.1 percentage points. The impact on spending will be modest in the medium term, but the restart of payments may still cause financial stress for Americans.

4. End of payment pause

The pandemic-related pause on federal student loan payments is set to end in September, after more than three years of extension. After the pause on federal student loans comes to an end, around 44 million individuals will need to resume making payments. It is possible that these people may be uncertain about how much they owe, as well as when and how to pay. Neglecting to make payments may cause additional financial charges. Despite the fact that the Federal Student Aid office will have more tasks to carry out, Congress only allocated an operating budget similar to the one from the previous year, which is $800 million lower than what the Biden administration had requested for this year. Moreover, some student loan service providers have reduced their customer service hours, which further exacerbates concerns regarding a difficult repayment process. Consequently, it is advisable for borrowers to promptly seek clarification from their student loan service provider regarding any inquiries they may have about their loans. 

5. Extra financial stress for Americans

As the September restart of monthly payments for student loan borrowers approaches, concerns are raised about the extra financial stress it may cause for Americans who are still recovering from the pandemic’s financial impacts. A survey of 1,006 adults found that 43% of borrowers don’t feel financially stable, and 21% have no savings. In another survey, 53% of borrowers said their financial stability depends on loan forgiveness or the federal forbearance period, with 26% using previously paid loan money for bills and necessities. Experts fear that households hit with this extra bill may compound the issues already in place, including the specter of a downturn.

6. Possibility of a downturn

Experts are divided on how the restart of student loan payments will affect the economy. While some predict a modest drag on spending, others are concerned about the potential for a downturn. Jefferies’ US economist, Thomas Simmons, has been anticipating a recession in the second half of the year, and he believes that the student loan issue compounds problems that are already in place. Borrower advocates are also concerned, especially considering that the majority of borrowers have yet to recover financially from the pandemic. They are worried that consumers who have depleted their savings to offset inflation now have to deal with an extra bill, making this the worst possible time for many households to resume paying student loans. Any downturn or further financial hardship may have detrimental effects on the economy.

7. White House debt limit deal

The White House debt limit deal entails that student loan payments will resume after a long pandemic pause. The agreement includes a provision that prevents the Education Secretary from extending the pause on payments again. The bill specifies that the pause shall cease to be effective 60 days after June 30. This effectively dashes the hopes of borrowers who expected an extension of the pause for the ninth time. The resumption of payments will affect millions of Americans who have taken out federal student loans to pay for college. The debt ceiling legislation would end the pause on student loan payments on August 30 at the latest. It remains to be seen how quickly the government will act if the Supreme Court allows the student loan forgiveness program to take effect.

8. Supreme Court ruling on loan forgiveness

The Supreme Court is set to rule on the legality of President Biden’s proposed student loan forgiveness plan, which could have significant economic implications. Depending on the Court’s decision, millions of Americans could have a substantial portion, if not all, of their student loans forgiven. Those who never completed college hold a smaller share of loans, but those borrowers could become debt-free if the policy is enacted. However, the economic impact of widespread forgiveness is debated, and experts are split on whether it will have a positive or negative effect. If the court rules in favor of forgiveness, Goldman Sachs researchers estimate that $400 billion in student loan balances would be discharged if all eligible borrowers enroll. This could lower debt payments to 0.3% from 0.4% of personal income and reduce outstanding federal student debt by around 25%.

9. Effect on personal consumption expenditure

The restart of student loan payments could have a significant impact on personal consumption expenditure (PCE) growth this year. Experts estimate that if forgiveness is denied, student loan payments could subtract 0.2 percentage points from PCE growth, which is the outcome they believe to be the most likely. On the other hand, if forgiveness is upheld, the repayments will lower PCE growth by just 0.1 percentage point. This emphasizes the potential impact of student loans on the economy, as PCE represents a significant portion of the overall growth in gross domestic product (GDP) and is a key indicator of economic activity. With borrower advocates concerned about the financial stability of borrowers, it remains to be seen how the restart of payments will affect overall spending and consumption.

10. Borrower advocates’ concerns

Borrower advocates are concerned about the restart in student loan payments and its impact on the economy, especially for financially struggling borrowers. Many Americans have had to deal with extra financial stress due to the pandemic, and the end of the student loan forbearance period could compound these issues. Borrowers who depend on the payment pause to get by fear that restarting monthly payments in September could cause them to take on more debt or lead to default. According to a recent survey, 43% of student borrowers do not feel financially stable, and 21% have no savings. If repayment starts in September, borrowers may have to use their savings, taking away from their ability to spend money and creating a drag on the economy.

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