Starting September 1, 2023, the roughly 43 million Americans with federal student debt will see interest accrue on their loans for the first time in more than three years, with payments expected to restart in October. The end of the pandemic-era forbearance policy could siphon more than $70 billion per year out of the economy. Although household finances will be somewhat buffered in the short term due to a lengthy grace period and generous repayment plans, the restart will certainly yield financial and logistical difficulties for many borrowers across the country.
A Looming Financial Challenge?
The resumption of student loan repayments comes on the heels of weak consumer spending in recent months, the end of other pandemic-era program expansions, and tightening credit markets that also make other debts more expensive and burdensome—deepening the financial stresses that many student borrowers face. While household bank accounts remain in better shape, on average, than before the pandemic due to robust stimulus programs, the cash reserves accumulated have been largely spent down. As a result, some forecasters estimate that 90% of the funds borrowers allocate towards repayments will come from reducing their consumption rather than personal savings. This could modestly impact U.S. economic activity over the coming months, with Morgan Stanley estimating that a drop in consumer spending could yield a decrease of 0.5% in the real Personal Consumption Expenditure Index this fall and that repayments could create a slight drag on economic activity in the fourth quarter.
Further, despite the fact that lower-income households typically have borrowed less for postsecondary education than their higher-income counterparts, their outstanding debt tends to be much higher as a percentage of their income. This means the resumption of payments—which will likely not pose significant stress on household finances for most borrowers—could pose a challenge to lower earners, as the lowest two income quintiles will collectively owe around $7 billion per year. These factors suggest that the resumption of student loan payments has the potential to push lower-earning households to the brink of financial insecurity, with the risk of downstream effects during the next economic downturn.
The Biden administration has, however, taken steps to alleviate some of this financial pressure, including an “on-ramp plan” that essentially allows nonpayment (or a grace period) for the first 12 months after payments officially restart. Although interest will accrue during this period, nonpayment will not affect a borrower’s credit rating.
In addition, many borrowers participate in income-driven repayment (IDR) plans, which exempt those with incomes below 100% or 150% of the federal poverty level (depending on the specific plan) from monthly payments and limit monthly payments to an affordable share of income for others. The administration is also in the process of rolling out the Saving on a Valuable Education (SAVE) plan, which aims to provide IDR on even more generous terms. As a result of these provisions, as well as the ability of some borrowers to go into forbearance or deferment because of financial hardships, out-of-pocket loan payments will likely be heavily concentrated among households in the top half of the income distribution. It is important to note, however, that parents who borrow for their child’s education are generally ineligible for IDR plans. Consequently, lower-income parent borrowers may face disproportionate hardship from the restart.
Beyond Financial Pressures, Logistical Hurdles
The administrative challenges that borrowers could face as loan payments restart, however, has received too little attention. Those who left college during the past three years may not be familiar with how to make payments, as they have not yet been required to do so. Further, among those borrowers who made payments in the past, the Consumer Financial Protection Bureau reports that more than 40% will return to repayment with a new student loan servicer. Borrowers will need to confirm what company is servicing their loan. Some will need to create new logins, re-enroll in autopay, or update their information, and the transitions between servicers may lead to communications breakdowns, lost paperwork, and errors in borrower records. Less than a third of borrowers know when payments are set to resume according to one recent survey, and nearly half don’t know how much their payments will be. Meanwhile, the Office of Federal Student Aid faces a budget crunch that will impede its ability to help smooth this tumultuous period. The combination of these factors is likely to severely impair the ability of servicers to provide adequate assistance for borrowers.
Strained customer service operations are most likely to impact those in need of alternative repayment options or attempting to enroll in an IDR plan. Prior to the pandemic and suspension of student loan payments, many borrowers who could have benefited from IDR did not enroll in a plan because they never learned about the option or struggled to comply with the administrative requirements—and because providers had few incentives to enroll borrowers. Although the Biden administration is taking steps to facilitate borrower access to IDR plans, bureaucratic obstacles remain. For example, under new rules, a borrower who goes 75 days without making a payment will be automatically enrolled in the SAVE plan; this is good policy, but the catch is that it can only happen if the borrower has previously given approval for disclosure of their federal tax information to the Department of Education.
Taken together, these factors suggest that, even for borrowers who have the financial means to make their loan payments—or who, in theory, should not even owe payments—logistical hurdles could pose serious challenges. These challenges are likely to be greater still for distressed and low-income borrowers.
Attack the Causes, Not the Symptoms
Policymakers’ recent focus on debt forgiveness and extensions of the loan repayment pause distracted from the root of the problem—the declining affordability of higher education that has led to ballooning student debt.
BPC has consistently called for a comprehensive, bipartisan legislative solution that streamlines the student loan repayment process, targets relief to lower-income borrowers, and reduces reliance on the federal student loan system in the first place. Congress could, for example, establish a single, simplified IDR plan into which all borrowers are automatically enrolled and that improves on the SAVE plan by including a progressive payment formula to better target relief for struggling borrowers while ensuring that higher-income borrowers fully repay their loans.
A high-quality college education generally yields a large return on investment, but the ongoing student debt challenge indicates the U.S. must still make considerable progress on college affordability, accountability, and accessibility. In addition to simplifying and streamlining student loan repayments, policymakers must also develop bipartisan solutions that reduce the cost of higher education and promote student success.
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