What will happen to borrowers and the economy if Biden allows student loan payments to resume after August 31st?

Less than two weeks until the latest moratorium on federal student loan payments expires on August 31st.

You don’t have to tell Kathy Smith.

The likelihood of resuming payments is “a rain cloud looming over my head every day,” said Smith, a 33-year-old college lecturer in Austin, Texas who has $52,000 in student loan debt pending. say.

Smith is a lecturer at Texas State University for students pursuing a social work degree. After years of working in the typically low-paying field of social work, she took the job after seeing her former colleagues drift into more lucrative avenues such as real estate. Because she works at a public university, Smith believes that at least she can go through 10 years of payments to finally qualify for a program that wipes out the federal debt of civil servants. But in the meantime, she feels weighed down by her monthly student loan bills. That is, until she freezes.

“The pause meant everything. It shifted and reshaped a reality I never dreamed possible,” Smith said. A pandemic-era moratorium extended by both of the Biden administrations freed Smith from a $268 monthly payment. rice field. This is no small feat for a single woman living in an expensive city.

Still, she has a sideline pet and is about to start a new job as an elementary school mentor, betting her student loan payments will resume.

Smith and the other 43 million student loan borrowers await answers from the Biden administration on their next response, so they can either resume payments, extend the suspension, and/or Debate rages on the authorities’ decision on whether to provide loans and the potential economic impact. write-off of debt.A few economists argue Student debt relief could fuel inflation by freeing up cash for borrowers to spend. Other experts counter that student loan assistance is likely to encourage borrowers to save extra money and pay off other debts.

When asked for comment on Friday, the White House pointed to comments from Press Secretary Carine Jeanpierre earlier this month. No decision has yet been made on the suspension or cancellation that Jean-Pierre said at the Aug. 9 briefing. The president knows that loans can add a financial “burden.” “He will have something by his August 31st,” said Jean-Pierre.

Mark Goldwain, senior vice president of the Committee for a Responsible Federal Budget, is concerned that further relief to borrowers could exacerbate the current inflation environment.

“Two things can be true,” he said. “Cancelling or suspending debt is financially good for the 13% of Americans” who took out student loans, he said. “But for the 87% of Americans who don’t have student loans, it’s bad financially.”

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. According to the Census Bureau, this represents her 13% of America’s 332.4 million population, including children. The largest share of borrowers is just over a quarter, from $10,000 he owes $25,000, according to New York Fed data. In a sign of the moratorium’s impact, researchers note that more than half of his student loan balances will not fall from his 2019 to his 2021.

As of the second quarter of 2022, American student loan debt will reach $1.59 trillion, according to New York Fed debt statistics.

In the short term, any suspension or cancellation could lead to inflation, Goldwein said. Going further, he estimates, could undermine much of the deficit reduction hoped for in newly enacted health care, climate change and tax packages.

“We allow people to spend more money than the economy can produce. When people have more wealth, they tend to spend some of their wealth,” he said.

Goldwein said resuming payments would not bring inflation down significantly. In some respects, Goldwein said, Biden is limited in what he can do to combat inflation. But as for what the Biden administration can do now to fight inflation, this is big in his view.

“We can literally control how much people spend next month,” Goldwein said.

Ari R. Bustamante, associate director for education, employment and workforce at the Roosevelt Institute, a progressive think tank, said this was an unnecessary threat to the economic security of too many people. I’m here.

Instead of causing a spike in spending, the moratorium allows borrowers to “pay off all their debt and save money,” he said. It is about improving wealth, which cannot be spent today or tomorrow. Wealth is something that accumulates over time.”

Bustamante said there is another way to think about the equity argument that a segment of the population benefits. The reason for this lies in policy decisions that have moved funding for higher education from the state to the household,” Bustamante said.

Additionally, canceling student debt could be particularly important for black households, Bustamante said. Black borrowers are more likely to take on student loans and borrow more money, he said, because of the wealth gap compared to white households.

If payments resume, New York Fed researchers say: [borrowers] Your balance will decrease. But some may face delinquency and default. —The number, they said, depends on the rules to follow. If payments resumed, researchers at the New York Fed found that “low-income, low-educated, non-white, female, and middle-aged borrowers would have an even harder time making the minimum payments and maintaining their current status.” I’m assuming.

In fact, borrowers are unevenly distributed across the economy and income ladder, which adds to the complexity.

According to the Employee Benefit and Research Institute, people like Smith in the education and health services industry were most likely to have student loans, with about 25% having them. But less than 8% of workers in construction and mining and 4% of workers in agriculture have student loan bills on their minds, according to researchers who analyzed 2020 Census data. was less than

Some industries can be more difficult to pay than others. Nearly 10 of the business and professional services workers, two of whom had loans, earned an average income of more than $84,000, according to researchers. Meanwhile, those working in education and health services, such as teachers and nurses, earn about $64,500.

In Goldwein’s view, payments should have resumed by now. However, with less than two weeks to go before the deadline and no clear answer from the government, borrowers will need to receive a final short extension with a clear message that payments are about to begin. he thinks

Suspending first payments “was a very reasonable thing to do during an economic meltdown,” he said. But things have changed, he said, noting that the economy continues to add jobs even as inflation heats up. Told.

Cody Hoonanian, executive director of the Center for Student Debt Crisis, said at this point borrowers could be obsessed with payments from the president who campaigned for student loan debt forgiveness. I was.

A February survey by the organization said 92% of fully employed borrowers were worried about being able to make payments in the face of inflation.

These results may be even worse now, according to Hounanian. “Starting paying student loans when millions of Americans say gas is too expensive and food is too expensive is an economic catastrophe,” he said. .

Back in Texas, Smith was able to get a new car, partly because his income was released. As for her previous one, “I basically smashed it into the ground,” Smith said.

But now there are the unexpected costs of paying for a new car and paying for four new tires, all adding to the pressure that resuming payments can make even more severe. She says she gets frustrated going back and forth trying to pay off her debts or rack up her savings.

Smith refutes the idea of ​​loan forgiveness and suspends being unfair. So did the low wages of social workers and the gender pay gap, she said.

Canceling or at least suspending debt could alleviate the worries of so many cash-strapped families right now, she said.

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

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