After nearly two-and-a-half years of pandemic relief, federal student loan payments will resume after the August 31 break – unless extended for the seventh time.
It is said that President Joe Biden will announce a certain cancellation of student debt sometime this summer – but there is no guarantee.
And now that inflation has hit the highest in decades, student loan borrowers have an additional uncertainty to navigate: With prices higher for food, gas and so much more since the last time they paid off a student loan, what will then add these monthly payments back into the mix do by their economy?
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Economists like Kathryn Anne Edwards at Rand Corp., a nonprofit global think tank for public policy, say borrowers are likely to feel the effects of inflation when payments start up again, but it will depend on a person’s circumstances.
“It depends on whether the student loan payments will deduct from their current income, or whether the payments will deduct from their current income plus savings,” Edwards says. “If they’ve made targeted savings around restarting student loans, they have some extra pillow.”
Several financial forecasts expect inflation to peak this summer but remain high for the rest of the year. Here’s how both the restart of payment and the cancellation of student debt can affect your spending ability.
What inflation means for restarting student loan payments
Since income, savings, and debt are unequal across the board, even if it were not a period of high inflation, some would have a harder time adjusting student loans back to their budgets.
“People have a different amount of leeway when prices go up,” Edwards says.
“Some people may have saved up for it, and other people will be completely backed into a financial corner,” she says.
Robert Kelchen, professor and head of the Department of Educational Leadership and Policy Studies at the University of Tennessee, says it gets messy to restart student loan payments, no matter what.
“Borrowers have not paid for almost two and a half years, student loan providers were burned, the last time they thought the payments would have to be resumed, and there will be a lot of frustration among borrowers,” says Kelchen.
If you are worried about being able to repay your debt, you can do the following:
- Reassess your monthly budget: See if you have expenses you can cut back to fit your student loan back to your monthly spending. If you follow the budget of 50/30/20, it will mean that 50% of your consumption goes to “needs” – as your minimum payment of student loans and housing expenses – 30% goes to wishes and 20% to savings and repayment of debt.
- Consider income-driven repayment: Your service provider may tell you about other repayment options such as income-driven repayment, which will limit the payments to a portion of your income and extend your repayment period. It may end up lowering your payment, but you end up paying more interest over time.
- Take an extra break: Another payment break, such as an indulgence or postponement of unemployment should be a last resort. This is because while your payments are paused, interest continues to accrue and is credited to your principal balance when you start repaying.
How much could student loan cancellation help borrowers?
Recent White House leak to the press suggests that $ 10,000 is the likely amount borrowers can expect if cancellation occurs. Eligibility may also be tied to income, which would potentially result in an application process.
Cancellation of $ 10,000 per person has the potential to cancel debts for 15.2 million borrowers – if they all qualified. If it happens before payments restart, these eligible borrowers would be debt-free students.
For 30.5 million other borrowers, $ 10,000 in cancellation could bring the beneficiaries closer to repaying their debt in full, excluding any interest that grows faster than they can repay. However, this may not make it easier to meet their monthly payment obligations unless the education department chooses to recalculate monthly payment amounts using the new balance after the cancellation takes effect. It is unclear if that would happen.
One thing that is crucial to understand when canceling, experts say, is that you will not be handed money.
“The amount of money people get up front is very small,” Kelchen says. “Even if you have $ 10,000 in debt and it’s all forgiven, that means you do not pay for the next many years, it’s not like you get a $ 10,000 check.”
Can canceling or restarting payments make inflation worse?
The Biden administration’s message is that linking cancellation to restarting student loan payments would outweigh any wider impact on inflation that cancellation could have, according to a May briefing by White House National Economic Council Director Brian Deese.
Logically, if you restart student loan payments, borrowers will have less money to spend on other things. Edwards says it would reduce demand and therefore could be anti-inflationary.
And fears of cancellation exacerbating inflation are likely to be overestimated, according to Alí R. Bustamante, deputy director of the Worker Power and Economic Security program at the Roosevelt Institute, a liberal think tank. He says that cancellation is likely to have little effect on inflation – and subsequently the prices you pay for goods and services.
It all comes down to why inflation is high in the first place: It’s because of tight supply chains, not because consumers have more money to spend, Bustamante says. Again, cancellation does not put more money in people’s pockets, it rather removes the restriction of debt.
Cancellation would make a big difference to individuals’ long-term financial prospects. But on a broader scale, even full cancellation – all $ 1.7 trillion of it – would not do much for inflation, Bustamante says.
“That would be insignificant in the short and long term given the wider scale of it,” he says. Canceling all $ 1.7 trillion in debt would have an impact on the 43 million borrowers with debt, but their families and relatives would also feel the effects, Bustamante points out. “If you measure the impact, $ 1.7 trillion in distribution is a minute,” he adds. “I think it underscores how big the U.S. economy is.”
Yet there is no clear consensus on how the cancellation will affect inflation. Others insist it would increase inflation, such as the Committee on a Responsible Federal Budget, a public policy organization in the center-right,
“There are people who do not like student loan cancellation as a policy that will say it will make it worse, and there are people who love student loan cancellation policy and they will say that student loan cancellation will do it. better, “says Edwards. “They use today’s … hot problem financially to make their point.”
In fact, the lack of details about cancellation and restart payments has given everyone with a stake in the issue room to make their point – except borrowers who can only wait and see.