by Zain Jaffer
Because the US economy almost ground to a halt during the COVID-19 pandemic, impacting business and employment, the federal government halted student loan payments and set interest rates to 0% for many student loans. The COVID emergency officially ended in May 2023. The US Congress subsequently passed a law ending the student loan payment pause.
In late June 2023, the US Supreme Court issued its decision blocking the Department of Education’s student loan debt relief plan, which would have forgiven $10,000-$20,000 per borrower in student loan debt. Student loan interest resumed on September 1, 2023, and borrowers will need to restart their payments in October 2023, accompanied by a formal notice from the US Department of Education. Loan servicers will provide borrowers with billing statements at least 21 days before their first payments are due. Borrowers will also be informed if their monthly loan repayment costs will increase with the resumption of payments.
Taken alone it seems like a fair deal. Students borrowed money to pay for their college costs, and are expected to pay it back with interest in the future. Aside from the fact that the US Supreme Court has shot down the proposed Biden administration student loan forgiveness, this plan was also unpopular with blue collar taxpayers from the start.
If the college degree resulted in a higher paying job for the loan recipient, then the loan was an investment that paid off. But if the loan recipient left a job to go back to school, did not get a good job after getting the degree, and ended up in a worse place as compared to peers who did not leave school, then the loan just becomes a burden.
The problem at the moment is that the US economy is in the early portion of a recession brought about by a sudden increase in interest rates. Banks are now making it hard to lend to small businesses because the overnight Fed lending rate is now around 5.5%. The ten year bond yield is also higher, and this pulls away money from risky ventures and businesses. Basically credit or debt is now expensive, personal savings from the COVID pandemic cash handouts are now starting to get depleted, credit card debt is now past one trillion dollars, and home loans are now around 7.5% for a thirty year Fannie Mae or Freddie Mac mortgage.
In short, everyone is on a tight leash. Personal savings became very high during the pandemic because everyone was at home, no one was spending outside, and the government gave money to millions of Americans. Right now the job of the Fed is to flush out excess cash from the economy, making it very expensive to borrow or go on a loan.
For those buying a home, many are now at a 40% debt to income ratio, which is on dangerous ground. Ideally debt servicing for housing costs should only be around 30% of a buyer’s total monthly income. The higher it goes up, the risk of going into foreclosure also goes up. So for a home buyer who is not making enough and whose debt to income ratio was already running dangerously high, resuming payments on student loans could be the final straw that breaks that camel’s back.
The Democrats, particularly President Joe Biden, are still looking for ways to fulfill this campaign promise. The problem however is that the US deficit is now past $32T because of the COVID pandemic cash injections, past global war spending, military spending, and social programs like Medicare and Social Security. The population is also increasingly skewing towards older workers and retirees and not younger workers. Hence tax collections are not enough to cover runaway US spending.
Given that the US Supreme Court has already shot down the student loan forgiveness program, loan recipients really have no choice but to bite the bullet and pay the loan. There is no other way around that fact.
SOURCES