Can student borrowers handle payments and inflation?
By Anna Helhoski | NerdWallet
After nearly two and a half years of pandemic relief, federal student loan repayments will resume after the pause expires on Aug. 31 — unless it’s extended for the seventh time.
There is talk that President Joe Biden will announce student debt cancellation this summer – but there are no guarantees.
And now that inflation is at its highest rate in decades, student loan borrowers have additional uncertainty to manage: with higher prices for food, gas and more since the last time they made a student loan payment, what will add to those monthly payments? in the mix do to their finances?
Economists like Kathryn Anne Edwards of Rand Corp., a global nonprofit public policy think tank, say borrowers will likely feel the impact of inflation when payments restart, but that will depend on where the country is. each.
“It depends on whether the student loan payments are going to be taken from their current income or whether the payments are going to be taken from their current income plus their savings,” Edwards explains. “If they’ve made targeted savings around restarting student loans, they have an extra cushion.”
Several financial forecasts predict that inflation will peak this summer, but will remain high for the rest of the year. Here’s how restarting payments and canceling student debt could impact your purchasing power.
What inflation means for restarting student loan repayment
Since income, savings, and debt are unequal across the board, even if it weren’t a time of high inflation, some would have a harder time getting student loans back into their budget.
“People have different leeway when prices go up,” Edwards says.
“Some people may have saved up for it and others are going to be completely stuck in 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 restarting student loan repayments is going to get messy no matter what.
“Borrowers haven’t paid for almost two and a half years, student loan servicers got burned the last time they thought payments were going to resume, and there will be a lot of frustration among borrowers,” says Kelchen.
If you’re worried about not being able to repay your debt, here’s what you can do:
- Re-evaluate your monthly budget: See if you have any expenses you can reduce to reintegrate your student loan into your monthly expenses. If you follow the 50/30/20 budget, that would mean 50% of your spending goes to “needs” — like your minimum student loan payment and housing costs — 30% goes to wants and 20% goes to needs. savings and debt repayment.
- Consider income-based repayment: Your managing agent can talk to you about other repayment options like income-based repayment, which would cap payments at a portion of your income and extend your repayment term. This might end up lowering your payment, but you’ll end up paying more interest over time.
- Take an extra break: Another payment break, such as a hardship forbearance or unemployment deferment, should be a last resort. This is because while your payments are suspended, interest continues to accrue and is added to your main balance when you begin to repay.
How could canceling a student loan help borrowers?
Recent White House leaks to the press suggest $10,000 is the likely amount borrowers can expect in the event of a cancellation. Eligibility could also be tied to income, which would potentially lead to an application process.
Canceling $10,000 per person has the potential to wipe out the debt of 15.2 million borrowers – if they all qualify. If this happens before payments restart, these eligible borrowers will no longer have student debt.
For another 30.5 million borrowers, a $10,000 forgiveness could bring eligible people one step closer to repaying their debt in full, except for any interest that accrues faster than they can repay. But this may not make it easier to meet their monthly payment obligations, unless the education department chooses to recalculate the monthly payment amounts using the new balance after the cancellation takes effect. We don’t know if that would happen.
One thing that’s critical to understand about cancellation, experts say, is that you’re not given any money back.
“The amount of money people get upfront is very small,” Kelchen says. “Even if you have $10,000 in debt and it’s all forgiven, that means you don’t make payments for the next few years, it’s not like you get a check for $10,000.”
Could canceling or resuming payments make inflation worse?
The message from the Biden administration is that coupling the cancellation with the restart of student loan payments would offset any broader impact on inflation that the cancellation may have, according to a May press briefing from the Board Director. White House national economist, Brian Deese.
Logically, if you restart student loan repayments, borrowers will have less money to spend on other things. Edwards says this would reduce demand and therefore could be anti-inflationary.
And fears about the cancellation worsening inflation are likely overblown, 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 the cancellation would likely have little impact on inflation – and therefore on the prices you pay for goods and services.
It all depends on why inflation is high in the first place: It’s because of tight supply chains, not because consumers have more money to spend, says Bustamante. Again, cancellation does not put more money in people’s pockets, but rather removes the debt constraint.
Cancellation would make a big difference to individuals’ long-term financial prospects. But on a larger scale, even a full write-off — the full $1.7 trillion — wouldn’t do much to inflation, Bustamante says.
“It would be insignificant in the short and long term, given its broader magnitude,” he says. Canceling the entire $1.7 trillion debt would impact the 43 million indebted borrowers, but their families and dependents would also feel the effects, Bustamante points out. “If you measure the impact, a distribution of $1.7 trillion is tiny,” he adds. “I think that underscores how important the US economy is.”
Yet there is no clear consensus on the impact of the cancellation on inflation. Others insist that it would add to inflation, such as the Committee for a Responsible Federal Budget, a center-right public policy organization,
“There are people who don’t like student loan forgiveness as a policy who will say it will make it worse and there are people who like student loan forgiveness policy and they will say that the canceling the student loan will improve it,” Edwards said. . “They economically use the hot issue of the day to make their point.”
In fact, the lack of details on canceling and restarting payments has given everyone with a stake in the issuer room to make their point – except borrowers, who can only ‘wait and see.
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