‘Pause means everything:’ What will happen to borrowers — and the economy — if Biden lets student loan payments resume in September

There are less than two weeks left until the final pause on federal student loan payments expires on August 31st.

You don’t have to tell Cassie Smith.

The possibility of restarting payments is “a looming rain cloud that sits over my head every day,” says Smith, 33, a college lecturer who lives in Austin, Texas with $52,000 in pending student loan debt.

Smith is a lecturer at the University of Texas for students pursuing social work degrees. He took the job after years in the typically lower-paying field of social work, watching some former colleagues drift into more lucrative paths like real estate. Because she works for a public college, Smith believes she will eventually qualify for a program that eliminates public employee federal debt after at least 10 years of payments. But in the meantime, she’s been feeling squeezed by her monthly student loan bill — to the point of freezing, that is.

“Pause means everything. It has changed and reshaped a reality for me that I never dreamed possible,” Smith said. The pandemic moratorium that began in March 2020 and was extended by the Trump and Biden administrations released Smith from a monthly payment of $268. It enabled her to pay off her credit card debt, her old car and stocking up on a down payment on a condominium – no small feat for a single woman living in an expensive city.

However, he has a side job and is preparing to start a new one as an elementary school mentor on the bet that the student loan payments will continue.

As Smith and the 43 million other student loan borrowers wait for answers from the Biden administration about what’s next, a debate is unfolding about officials’ decision about possible financial impacts — whether it’s restarting payments, extending the freeze and/or offer broad-based debt cancellation. Some economists argue that student debt relief could boost inflation by freeing up cash for borrowers to spend. Other experts argue that student loan help would likely prompt borrowers to save additional funds and pay down other debt.

When reached for comment Friday, the White House pointed to comments made earlier this month by spokeswoman Karin Jean-Pierre. No decisions have yet been made regarding a pause or cancellation, as Jean-Pierre said during the August 9 briefing. The president knows that the financial “burden” can add to the loans. “He will have something before August 31,” Jean-Pierre said.

Marc Goldwein, senior vice chairman at the Committee for a Responsible Federal Budget, worries that more relief for borrowers could worsen the current inflationary environment.

“Two things may be true,” he said. “Debt cancellation or debt relief is financially good for 13% of Americans,” he said. “But it’s financially bad for the 87% of Americans who don’t have student loans.”

By the fourth quarter of last year, there were about 43.4 million student loan borrowers, according to the Federal Reserve Bank of New York. That’s 13 percent of America’s 332.4 million people, which includes children, according to the Census Bureau. The largest share of borrowers, just over a quarter, owe between $10,000 and $25,000, according to data from the New York Fed. In an indication of the impact of the pause, more than half of student loan balances have not decreased from 2019 to 2021, the researchers noted.

Americans had $1.59 trillion in student loan debt in the second quarter of 2022, according to New York Fed debt statistics.

In the short term, layoffs and cancellations could contribute to inflation because it frees up cash for spending, Goldwein said. Further, it could undermine much of the hope for deficit reduction in the recently enacted health care, climate and tax package, he estimated.

“We’re giving people more money to spend than the economy can produce. When people’s wealth goes up, they tend to spend some of their wealth,” he said.

The resumption of payments alone is not going to make a massive dent in inflation rates, Goldwein said. In a way, there’s only so much Biden can do to fight inflation, Goldwine said — in this case, it’s the Federal Reserve, not the president, who sets interest rates. But for the things the Biden administration can do to fight inflation now, that’s big in his view.

“They can check how much people spend literally in the next month,” Goldwein noted.

This is an unnecessary threat to the economic security of too many people, said Alí R. Bustamante, associate director, education, jobs and workforce at the Roosevelt Institute, a progressive think tank.

Rather than sparking a spending spree, the pauses let borrowers “pay off all their debt and save,” he said. “What it actually looks like is improving their wealth and their wealth is something you can’t spend today or tomorrow. Wealth is something you accumulate over time.”

There is another way to think about the fairness argument for a part of the population that benefits, Bustamante said. The cost of higher education has risen over the past two decades, and “the reasons the student debt crisis exists are policy decisions” that have shifted “higher education funding from states to families,” Bustamante said.

Additionally, student debt forgiveness could be especially important to black households, Bustamante said. With the wealth gap compared to white households, black borrowers are more likely to take on student debt and borrow more money, he said.

If payments resume, New York Fed researchers said “a lot [borrowers] will reduce their balances.” But some could face delinquency or default. — how much depends on the rules they follow, they said. If payments resume, New York Fed researchers estimated that “lower-income, less-educated, non-white, female and middle-aged borrowers will have a harder time making minimum payments and staying current.”

Indeed, borrowers are unevenly distributed across the economy and across the income spectrum – adding to the complexity.

People in education and health care, like Smith, were more likely to have student debt, with nearly 25 percent owing student loans, according to the Employee Benefit and Research Institute. But less than 8 percent of construction and mining workers and less than 4 percent of people in agriculture had student loan bills hanging over their heads, researchers said as they analyzed 2020 Census data.

Payments can be more difficult to make in some industries than others. Nearly two in 10 business and professional services workers had loans, but their income averaged more than $84,000, the researchers said. Meanwhile, people in education and health services, such as teachers and nurses, earned about $64,500.

Payments should have resumed by now, according to Goldwein. But with less than two weeks to go before the deadline and no clear response from the administration, he believes borrowers should get a final, short extension with a clear signal that payments are about to begin.

The initial payment freeze “made a lot of sense to do when the economy was in meltdown,” he said. But the picture has changed, he said, showing jobs continue to be added to the economy even when inflation is high. “There is no emergency at this time that would require this pause to continue,” Goldwein said.

Borrowers at this point are less than a pay period away from being paid with payments from a president who made student loan debt cancellation part of his campaign, said Cody Hounanian, executive director of the Student Debt Crisis Center.

In a February survey by the agency, 92% of fully employed borrowers said they were worried about being able to afford payments in the face of inflation.

Those results could likely be worse now, Hunanian said. “Triggering student loan payments at a time when millions of Americans say gas is too high and food is too expensive is a financial disaster,” he said.

Back in Texas, Smith was able to get a new car thanks in part to the freed up income. As for her previous one, “I had basically driven it into the ground,” Smith said.

But now there’s a new car payment and the unexpected cost of paying for four new tires — all of which add to the pressure that could tighten as payments resume. She says she gets frustrated when she jumps back and forth between trying to pay off debt or building up savings.

Smith rejects the idea of ​​writing off the loan and stops short of it being unfair. The same goes for the underpayment of social workers, as well as the gender pay gap, he said.

Eliminating the debts, or at least stopping them further, could ease the worries of so many families who don’t have money now, he said.

“It’s taxing to live in America with the debt that exists right now.”

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