The $1.6 trillion student debt problem that hangs over the U.S. economy

The fate of the U.S. economy rests on the vitality of the U.S. consumer, and there is a mystery to it. No one knows when the tens of millions of people taking out federal student loans will have to pay off their debt. The amount involved is not small. Such outstanding debt is he $1.6 trillion, and the government has stopped collecting most of it.

The way America finances higher education has long held back the American economy. All the borrowed money helps drive up the already exorbitant tuition fees. Many students, especially in minority communities, struggle for decades to escape the burden of loans.

But during the pandemic, the story takes an unlikely turn. U.S. student borrowers still owe a lot, but pay very little. The federal student loan forgiveness program has been in place for more than two years since it was launched by the Trump administration early in the pandemic.

The current moratorium on student debt collection is set to end on Aug. 31, but political observers expect the Biden administration to issue another extension.

Beyond the moratorium on payments, it remains unclear whether there is sufficient political will in Washington to replace it with policies that make it easier for Americans to obtain higher education without risking extreme poverty.

Prominent Democratic lawmakers are calling for student loan cancellations of up to $50,000 per borrower. President Joe Biden is said to support allowing about $10,000 each to people whose annual income is less than his $125,000. Republicans are against debt forgiveness, and Senate Majority Leader Mitch McConnell said it would “huge every family who sacrificed their savings for college.”

Uncertainty about the current direction of the US economy will only make decisions more difficult. Mark Zandy, chief economist at Moody’s Analytics, said high inflation has dampened the appetite for debt forgiveness, while fears of a recession make it harder to resume collections. In other words, this political can is going to be kicked in the future.

“At some point, the federal government has to make a decision. The moratorium cannot go on forever,” Zandi said. “But until the economy weathers this period of high inflation and high recession risk, the student loan issue leaves us feeling stuck in amber.”

The stakes are high. He had $1.6 trillion in U.S. student loan debt in the second quarter, according to the Federal Reserve Bank of New York, which is $700 billion more than Americans owed on credit cards. Most of the money owes the federal government.

Federal student loan payments and accrual of interest were stopped under the U.S. leniency initiative, but delinquent borrowings were marked as current. have been bailed out and have been forgiven about $226 billion in loan payments to date. According to a Philadelphia Fed report, “nearly four of her five student borrowers have skipped some or all of their scheduled payments since April 2020.”

The resulting improvement in consumer finance was documented in a New York Fed report released this month. It found that 79.1% of student loan borrowers’ credit scores rose during the pandemic. This is a dramatic improvement over what was recorded in the two years before the Covid-19 outbreak.

But economists at the New York Fed believe that the rise may be temporary. They were encouraged that the decline in credit card usage by borrowers reflected some of the improvement in credit scores. On the other hand, some delinquents found their scores improved dramatically just because their loans were marked as eligible under the repayment grace program.

Authorities will need to move cautiously to resume collecting some types of federal student loans. Tolerance has clearly helped borrowers, but it has masked the hardships of many during the pandemic. We’ll only find out later how they are doing.

A report by economists at the Philadelphia Fed paid particular attention to a “significant proportion of education loan borrowers” who they described as “chronically struggling.” Many of these people took out student loans but were unable to complete a degree or find a job in their field of specialization.

“Borrowers with chronic repayment difficulties benefit from automatic deferrals,” the report’s authors said.

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