Student loans: frozen but not forgiven, debt is coming due soon

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For millions of Americans, there is a downside to the return to the status quo after the pandemic: They will have to start paying down their student loans again.

More than 40 million federal loan holders are expected to resume making monthly payments on October 1, when the freeze imposed as part of the Covid-19 relief measures is expected to expire. It covered payments worth about $ 7 billion a month, the Federal Reserve Bank of New York valued. Their recovery will eat away at a large part of household budgets, which could slow down the recovery in consumption.

Breathing room

Before the debt freeze, a large chunk of student loans went unpaid

Source: New York Fed / Equifax Consumer Credit Panel

Americans now owe about $ 1.7 trillion in student debt, more than twice the amount of their credit card debt. Politicians recognize that this is not sustainable. Yet despite all the talk about loan cancellation during last year’s election campaign – including from President Joe Biden, who pledged to cancel at least $ 10,000 per borrower – there is had no progress towards reducing the stack.

Graduates fresh from college or postgraduate programs, when incomes are typically lower, tend to find payment particularly difficult. Since the US economy is still 7.6 million jobs below pre-pandemic levels, many more of them are likely out of work now.

Cliff student loan expects more than 40 million Americans

But the problem of student debt affects just about every demographic group. Black borrowers are the most likely to have difficulty, studies showed. Retirees as well as young graduates are supported.

Older borrowers are increasingly trapped

Since 2017, student loan debt has increased for older Americans

Source: Ministry of Education


And the impact on the wider economy manifests itself in all kinds of ways. Student debt is one reason record numbers of young Americans are still living with their parents. It acts as a drag on people who would otherwise want to start a family or a business – and leaves millions of households strapped for cash to spend or invest.

“I’m probably going to have to find a second job,” speculates Dan Ott, 55, a management consultant in San Francisco who has about $ 200,000 in student debt. “We will have to reduce, and it will certainly be painful. “

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Dan Ott

Before the pandemic, it was clear that Americans were struggling to honor their student debts. Loans in arrears (over 90 days overdue) exceeded $ 135 billion before the freeze, a higher rate than most types of debt.

The New York Fed has warned that the actual number of loans gone bad is likely twice as high as many borrowers haven’t reached the stage where they need to start making payments.

What made the squeeze worse was that college degrees – which are now much more prevalent – turned out to be assets with diminishing returns in terms of enhanced earnings, according to a St. Louis Federal Reserve study.

“For recent generations and for non-white students, the earnings are somewhat below average,” wrote analysts William Emmons, Ana Hernández Kent and Lowell Ricketts. “The conventional wisdom about college isn’t as true as it used to be.”

‘Basically broken’

The feeling that degrees have been sold poorly underpins some of the calls for debt cancellation. Many Democrats like Senator Elizabeth Warren and Representative Alexandria Ocasio-Cortez have called for cancellations of $ 50,000 or more per borrower. Local leaders are lobby the Biden administration to take action.

Even some Republicans have joined. Wayne Johnson, the Trump administration’s first student aid chief, said the student loan system is fundamentally broken. He proposed not only $ 50,000 in debt relief, but also a similar sum in tax credits to those who have already paid for college.

In a hole

Millions of student loan holders owe over $ 1.5 trillion

Source: Ministry of Education


Biden has resisted his party’s calls to cancel loans by executive order. In early April, he asked Education Secretary Miguel Cardona to prepare a note on the president’s legal power to write off the debt.

The administration said it would review existing programs aimed at alleviating the student debt burden, including those known as income-based repayment plans that tie a borrower’s monthly bills to their income.

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Chelsea Barnes Walker

Chelsea Barnes-Walker, who currently lives in Knoxville, Tennessee, says she signed up for one of those plans to avoid default.

College for Barnes-Walker was a winding road that saw the 31-year-old attend six different schools. The financial expenses associated with losing her mother soon after graduation made it impossible to meet her ten-year, $ 400-per-month payment schedule. She was able to reduce that amount to less than $ 200 under an income-based plan, but will now pay for 25 years.

The next generation of students should give serious thought to the balance sheet, she says: “Many children are forced to determine what career they want to pursue. And most realized too late that it was not worth the debt. “

“Incredibly depressing”

The government has also taken other steps, including allowing employers to contribute to monthly student loan payments as a tax-free benefit. The pandemic relief bill in March of last year allowed companies to reimburse their employees up to $ 5,250 per year.

Malia Rivera, a 46-year-old marketing manager at Innovetive Petcare, based in Austin, Texas, said her employer has partnered with GiftofCollege.com, a platform that links automatic payroll deductions to student loans and to university savings accounts.

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Malia Rivera

Bloomberg

Rivera says she made sure to keep her own student loan payments even during the freeze. She says she has learned after “racking up late fees over the years and going through the trials and tribulations of career advancement” that automatic deductions as soon as she gets paid is the best route – and this has helped reduce his balance to about $ 8,000 from $ 38,000.

It took a long time. “I’ve been in a ‘long-term relationship’ with my student loan,” says Rivera, recalling the upfront payment she made in the first month of her marriage. “My husband is celebrating his 15th birthday with me… and my student loan. “

Yet for many borrowers, the freeze on Covid-19 repayments has made a big difference – and it is now due to expire.

Liz Tarzon, 49, who works for a nonprofit organization in San Francisco, has been reducing her student loan for more than 20 years. Last year, she says, “I felt my head was above water financially for the first time since I started repaying.”

But she is aware the reprieve was temporary and expects her to make the payments until retirement – or beyond. “It’s an incredibly depressing thought.”

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