Households already squeezed by inflation could soon face another financial blow: the resumption of student loan payments.

Federal student debt payments were first frozen in March 2020 as part of a broad stimulus effort meant to protect Americans from the worst of the pandemic economic slump. Even as the economy quickly recovered, leading to the strongest labor market in decades, the freeze was extended multiple times.

Now, the latest forbearance period is set to end Aug. 31 as prices surge for gas, groceries and rent, and fears grow that a recession is around the corner.

“People just don't have enough money,” said Thomas Gokey, co-founder of the Debt Collective, an advocacy group for those facing debt. “If they restart payments, whether it's in August, whether it's after the midterms, there will be mass defaults because people simply cannot pay.”

For Maria Gorman in Long Island, New York, paying student loan bills alongside rent and groceries is going to be a challenge. The 26-year-old just graduated from law school and starts a job as a public defender in New York City this September. That’s also when she’ll have to start paying back $145,000 in federal student debt, or roughly $500 a month, on a salary of about $70,000 a year.

Although she’s thankful for the forbearance period — which she estimates has saved her thousands of dollars in interest — Gorman is now scrambling to prepare for the loan payments. She’s currently living in her parents’ basement and plans to sell her car for extra money.

“I didn't realize so much of my salary would be going to loans that I needed for my education,” she said. “I’m going to end up eating a lot of ramen and not being able to do anything for fun.”

Higher Costs Everywhere
Surging rent prices across the country are pinching the already-tight budgets of many who have student loans. In Manhattan, median apartment rents just hit $4,000 for the first time ever, and one-bedroom rents nationwide rose nearly 12% in June from a year earlier, according to Zumper.

Meanwhile, gas prices are close to $5 per gallon on average, and food costs rose 10% year-over-year in May, the latest consumer price index report showed. That’s worrisome for Alex Raj, who didn’t finish college but has about $10,000 in federal student loans, which will cost him $190 a month.

“At some point we all have to start paying it back and that will obviously hurt,” said the 24-year-old who lives in Sacramento, California, and works for a security agency. “Things just don't cost what they used to.”

Only 56% of Americans under the age of 30 who went to college say the benefits outweigh the costs, according to a recent study from the Federal Reserve. The majority of the 43.4 million borrowers in the US — who hold a combined $1.75 trillion of student loan debt — made no payments toward their balance during the forbearance period, and half of borrowers in an April survey said they wouldn’t be able to make a single monthly payment if they had to.

Preeti Paliwal, a 31-year-old in New York City, currently holds $204,000 in debt after attending undergrad and grad school in New York for physical therapy. She said she opted to enroll in an income-driven repayment plan, which will direct 10% of her salary to her loans for 20 years, and estimates that she will have paid around $530,000 in that time period due to an 8% interest rate. It’s a monthly expense that has impacted her ability to buy a home, save for retirement and take care of her mother. 

“I don't think people consider the fact that the people who end up taking on the highest loan burdens are people with the least amount of familial wealth,” Paliwal said. “And we are punished for being low-income by being forced to pay more for our education than families who aren't poor or low-income because of interest rates.”

Rough Start
While student loans affect people of all ages, younger millennials and Gen Z are being hit particularly hard, especially since they typically have lower earnings.

Rachel Grantham, a 25-year-old in Kansas, has about $56,000 in student debt — most of it federal — from undergrad and grad school. With her job teaching sports psychology at a military school, making less than $60,000 a year, she’s dreading having to make about $560 a month in loan payments.

With rent of about $1,000 a month, plus the increased cost of gas, she’s struggling to figure out where in her budget she can cut expenses. Filling up her car now costs about $80 instead of $40 previously, and she already shops at low-priced grocery chain Aldi.

Even the reductions she’s made, like saving $200 a month by not eating out, aren’t going to be enough to cover her monthly student loan bill.

“The cost of school is much more expensive, but the wages people are getting after they get a degree are not what they used to be,” she said. “I don't have any money left over at the end of the day to pay these student loans back because the expenses of everything else just keep going up.”

This article was provided by Bloomberg News.