(Bloomberg) — For millions of Americans, there’s an unwelcome side of the return to business-as-usual after the pandemic: They’ll have to start repaying their student loans again.
More than 40 million holders of federal loans are due to start making monthly instalments again on Oct. 1, when the freeze imposed as part of Covid-19 relief measures is due to run out. It covered payments worth about $7 billion a month, the Federal Reserve Bank of New York estimated. Their resumption will eat a chunk out of household budgets, in a potential drag on the consumer recovery.
Americans now owe about $1.7 trillion of student debt, more than twice the size of their credit-card liabilities. Politicians recognize it’s not sustainable. Yet for all the talk of loan forgiveness during last year’s election campaign — including from President Joe Biden, who promised to write off at least $10,000 per borrower — there’s been no progress toward shrinking the pile.
Graduates fresh out of college or postgrad programs, when incomes are typically lower, tend to find payment especially hard. Since the U.S. economy is still 7.6 million jobs short of pre-pandemic levels, many more of them are likely to be out of work now.
But the student debt problem reaches deep into pretty much every demographic. Black borrowers are most likely to struggle, studies have shown. Retirees as well as recent graduates are on the hook.
And the impact on the wider economy shows up in all kinds of ways. Student debt is one reason why record numbers of younger Americans still live with their parents. It acts as a brake for people who’d otherwise want to start families or businesses — and leaves millions of households short of cash to spend or invest. “I’m going to have to probably get a second job,” speculates Dan Ott, 55, a management consultant in San Francisco who has about $200,000 in student debt. “We will have to cut back, and it will certainly be painful.”
Before the pandemic, it was clear that Americans were having trouble meeting their student-debt obligations. Loans in serious delinquency (more than 90 days late) exceeded $135 billion before the freeze — a higher rate than for most kinds of debt.
The New York Fed cautioned that the real number of loans gone bad is likely twice as high, since many borrowers haven’t reached the stage where they have to start making payments.
What’s made the squeeze worse is that college degrees — which are now much more widespread — turned out to be assets with a diminishing return in terms of enhanced earnings, according to a study by the St. Louis Federal Reserve.“For recent generations and for non-white students, the payoffs are somewhat lower than average,” wrote analysts William Emmons, Ana Hernández Kent and Lowell Ricketts. “The conventional wisdom about college is not as true as it used to be.”
The sense that degrees have been mis-sold underlies some of the calls for debt forgiveness. Many Democrats like Senator Elizabeth Warren and Representative Alexandria Ocasio-Cortez have called for write-offs of $50,000 or more per borrower. Local leaders are pressuring the Biden administration to take action.
Even some Republicans have joined in. Wayne Johnson, the Trump administration’s first student-aid chief, said the student-loan system is fundamentally broken. He proposed not just $50,000 in debt relief but also a similar sum in tax credits to those who paid for college already.
Biden has resisted calls from within his party to write off the loans via executive order. In early April, he asked Education Secretary Miguel Cardona to prepare a memo on the president’s legal authority to cancel debt.
The administration has said it will review existing programs aimed at easing the student debt burden, including those known as income-based repayment plans that tie a borrower’s monthly bills to their earnings.
Chelsea Barnes-Walker, currently living in Knoxville, Tennessee, says she enrolled in one of those plans to avoid defaulting.
College for Barnes-Walker was a winding path that saw the 31-year-old attend six different schools. Financial expenses associated with the loss of her mother shortly after graduating made it impossible to keep to her schedule of $400-a-month payments over ten years. She’s been able to reduce that to below $200 under an income-based plan — but will now be paying for 25 years.
The coming generation of students should think hard about the balance sheet, she says: “Many kids are pressured to figure out what careers they want to achieve. And most figure out too late that it was not worth the debt.”
Other steps the government has taken include allowing employers to contribute toward monthly student loan payments as a tax-free benefit. The pandemic relief bill in March last year allowed firms to reimburse employees up to $5,250 annually.
Malia Rivera, a 46-year old marketing executive with Austin, Texas-based Innovetive Petcare, says her employer has partnered with GiftofCollege.com, a platform that bridges automatic payroll deductions to student loans and college savings accounts.
Rivera says she’s made sure to keep up the payments on her own student loan even through the freeze. She says she’s learned after “racking up late fees over the years and navigating the trials and tribulations of career advancement” that automatic deductions as soon as she gets paid are the best route — and it’s helped lower her balance to about $8,000 from $38,000.
That took time. “I have been in a ‘long-term relationship’ with my student loan,” says Rivera, recalling the initial payment that she made in the first month of her marriage. “My husband is celebrating his 15-year anniversary with me…and my student loan.”
Still, for many borrowers the Covid-19 freeze on repayments made a big difference — and it’s now due to expire.
Liz Tarzon, 49, who works for a non-profit in San Francisco, has been chipping away at her student loan for more than 20 years. This past year, she says, “I have felt that my head was above water financially for the first time since starting to repay.”
But she’s aware the reprieve was temporary, and expects she’ll be making the payments until retirement –- or beyond. “It’s an incredibly depressing thought.”
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