Almost half of student loan borrowers think they will remain in debt forever.
More than half of student loan borrowers think they will remain in debt forever. Veuer’s girlfriend Natasha Abellard reports on this story.
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The restart of student loan payments this fall was expected to be a hurdle for an economy facing a sharp slowdown and even a recession next year.
At least in part, this is not because many of the borrowers who owe a combined $1 trillion have not repaid their debts during the one-year grace period. Some businesses are taking advantage of the Biden administration’s income-based payment and loan forgiveness programs.
“The drag on the economy has eased and there is one small factor that could help avoid a recession,” said Nancy Vanden Houten, an economist at Oxford Economics.
Why were student loans suspended?
Congress suspended federal student loan payments in 2020 due to the coronavirus recession, giving Americans $260 billion in extra cash to help pay bills and sustain a fragile economy. .
But the three-and-a-half year freeze ends in October, with 22 million borrowers scheduled to make payments that month, with another 6 million expected to join later in the fall.
Payments are expected to reach up to $9 billion a month, Van Houten said, and consumer spending could fall by the same amount. Since consumption accounts for about 70% of economic activity, she calculated that siphoning off that much money would reduce economic growth by three-tenths of a percentage point in 2024. This equates to approximately 240,000 fewer jobs being added to the labor market.
For an economy expected to grow only around 1% next year, student loans could be upended on top of depleted pandemic-related household savings, record credit card debt, and still-high interest rates and inflation. . Some economists and business leaders said the United States would fall into a recession.
Target’s Chief Financial Officer Michael Fidelke told analysts in August that the upcoming resumption of student loan payments will put further pressure on the already strained budgets of tens of millions of households. I guess so,” he said.
So far, the hit to the economy appears to be much softer than feared.
What is the total monthly payment for my student loan?
Student loan payments soared from $1.2 billion in July to between $6 billion and $7 billion a month between August and October, according to the Treasury and the University of Oxford. But Van Houten speculates that the main reason for this is that some borrowers decided to repay a large portion of their principal to minimize the impact of rising interest rates.
Total student loan repayments were just $5.3 billion in November, but as of December they were growing at an average rate of $1.2 billion per week, or $4.8 billion per month, according to Treasury data. Van Houten expects economic growth to settle at about $5 billion per month, suppressing next year’s economic growth by about a tenth to 20 percentage points, compared to the up to $9 billion she originally predicted. Much smaller than the dollar’s hit to the economy.
In recent months, economists have lowered their expectations for the impact of loan payments, but the actual impact is likely to be more limited.
Several reports indicate that many borrowers are still considering options instead of paying their student loan bills.
How many student loan borrowers are in default?
The Department of Education announced in October that only 60% of the 22 million borrowers who had their loans due were repaid. blog This means that 40%, or about 9 million borrowers, missed payments, not including those already in default or those on forbearance or forbearance. That’s a much higher percentage of borrowers than the average 16% of borrowers who were delinquent before the pandemic. Student loan expert Mark Kantrowitz and author How to seek more college financial aid.
Kantrowitz said he had always expected the economic impact of the payments to be small, but the amount turned out to be even more modest than expected because so many people still haven’t paid. .
Education Undersecretary James Kvale suggested in a blog earlier this month that many borrowers were struggling and confused to cope with the end of the payment freeze.
“While most borrowers have already made their first payment, others may need more time,” he wrote. “Some people may feel confused or overwhelmed about their options. We want our borrowers to understand that our top priority is to help student loan borrowers get back into repayment. .”
in new york life investigation Of the 402 people who took out student loans in September, 27% said they were unsure how they would repay them once the moratorium ends. Furthermore, 23% said they would cut back on “daily expenses” such as eating out and concerts.
A separate poll by consumer behavior researcher Sarcana found that 9% of borrowers do not plan to make any more payments, 10% are waiting for further news on the government’s plans and 10% are unsure of what to do. It turns out there isn’t.
“This means many people won’t pay, at least for a while,” Marshall Cohen, chief retail industry analyst at Circana, wrote in an email. “That means $3 billion to $4 billion a month could be avoided being pulled back from discretionary spending.”
But Kantrowitz said even before student loan payments were suspended, the obligation was only 0.4% of gross domestic product.
“It’s a small percentage of GDP,” he says. “It’s not enough to cause an earthquake in the economy.”
Is personal consumption rising or falling?
Meanwhile, consumers continue to spend healthily.Retail sales rebounded last month after slumping in October.
Here are the payment-reducing alternatives the Biden administration is offering student loan borrowers and their economic impact:
Grace
A 12-month “on-ramp” allows borrowers to defer payments until September of next year at the latest. They are not subject to default, and missing a payment up to that point will not affect your credit score. However, the loan continues to accrue interest.
This means many additional student loan payments will resume by September, but the impact on the economy will be lessened as they are spread out over time.
Payment plan based on income
The Biden administration’s new income-driven payment plan, called SAVE (Savings for Worthy Education), is more generous than existing such plans, with 5.5 million borrowers currently enrolled in the plan, according to the Department of Education. It is said that there is.
Borrowers can pay as little as 10% of their disposable income, Kantrowitz said, and that number will drop to about 5% in July, compared with an average of 12% for other income-based plans. . There are also single people and families with incomes below $32,800. Her 4 out of 4 with incomes below her $67,000 have no payments and have higher income thresholds than other similar plans. Of his 5.5 million borrowers enrolled in SAVE, 2.9 million have zero payments.
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cancellation of debt
The Department of Education has canceled about $132 in debt for about 3.6 million borrowers, more than any other president. Among other things, debts are forgiven for public sector workers and borrowers who have made payments for at least 20 years.