The $1.8 trillion student debt bubble is about to burst.
After a three-year pause, payments on federal student loans are set to resume in the next six months, and the economic consequences will be far-reaching: More than 4 million Americans are expected to fall behind on their debt and millions more will struggle with the added costs as inflation slams consumers. Even those who can handle the bills will have less money to spend elsewhere, with experts predicting more delinquencies on credit cards and auto loans as the impact cascades through the economy.
The Supreme Court will hear arguments Feb. 28 in two cases dealing with President Joe Biden’s plan to forgive up to $20,000 in student debt per federal borrower. But however the court rules, the broader problem isn’t going away. The total amount of US student debt more than doubled over the last 12 years as tuition costs soared, and 15% of borrowers were already behind on payments before the pandemic pause. The number of defaults and delinquencies could rise and surpass pre-pandemic levels if payments resume without debt relief, according to the Federal Reserve Bank of New York.
“This is not just a moment in time where people aren’t going to be able to pay their bills,” said Max Lubin, co-founder and chief executive officer of Rise, a student advocacy group. “That kind of hardship and that kind of difficult experience is something that’s going to have repercussions around someone’s life and their livelihood for years to come.”
Student loan payments were paused in March 2020, part of the Trump administration’s bid to stem the economic damage from the pandemic. The moratorium has since been extended multiple times, but required student loan payments are scheduled to restart no later than Aug. 29, regardless of what the Supreme Court decides.
Even if the forgiveness plan is upheld, no more than 45% of borrowers will have their debt wiped out completely, meaning a majority are facing a big increase in their monthly bills. For Ally Rooker in Detroit, the resumption of $400 payments each month is going to hurt even more now that all her other expenses have increased. The 30-year-old, who works in public health, has about $80,000 total in federal loans from undergrad and grad school.
“It’s tough to wrap my head around having to pay that much a month pretty soon when my rent has gone up, inflation has gone up, everything costs so much more,” she said.
Court Battle
The Supreme Court case centers around Biden’s plan to forgive $10,000 per borrower — or $20,000 for Pell Grant recipients — with a $125,000 income cap for individuals and $250,000 for households. More than 40 million Americans are eligible for forgiveness, according to the administration, and about 26 million people have already submitted applications. If it goes ahead, it would wipe out more than $400 billion in debt.
Six Republican-led states are challenging the plan, saying it exceeds the president’s authority. A federal trial judge blocked the program, and the Supreme Court agreed to hear the administration’s appeal on a fast-track basis. The court later expanded the case to include arguments from two borrowers who say they are being unfairly excluded from the full benefits of the program.
Some outside legal experts have expressed skepticism that Biden’s plan will prevail, both because of the legal rationale the White House is using to defend it, as well as the court’s conservative majority. The administration is using a 2003 law called the Heroes Act to argue that it has the legal authority to cancel debt due to the financial hardship caused by the pandemic.
“The court has, in several big cases, been unwilling to see Covid as empowering agencies to adopt new and innovative rules,” said Adam Winkler, a law professor at the University of California in Los Angeles. “Just coming into this case was going to be a challenge for the Biden administration because student debt relief is exactly that.”
Payments Return
Before the pandemic pause, borrowers paid an average of $393 per month toward their student debt. Almost nine in 10 are worried about being able to afford the payments when they restart, according to a November survey from the Student Debt Crisis Center. And 56% of respondents with student loans in a recent Credit Karma survey say their financial stability depends on not having to make payments.
For Jade Budowski, a 29-year-old in Annapolis, Maryland, debt relief won’t wipe away her balance: She graduated in 2015 with $43,000 in federal debt, and has about $38,000 remaining after using an income-driven repayment plan.
The payment freeze meant she was able to afford health insurance for the first time and she’s holding out hope that the forgiveness plan survives so she can pay down her debt before having children.
“I am hoping to be in a better place financially by the time payments resume, but I do worry about having to forgo other essentials again if I’m not,” she said.
Even before announcing one-time forgiveness, the White House was working on additional reforms that will become all the more pivotal if the Supreme Court rules against Biden’s plan. Over the next year, the administration will attempt to get defaulted borrowers back into repayment, correct past accounting inaccuracies in existing programs and introduce a new income-driven repayment framework that could halve millions of borrowers’ monthly bills.
Changes to the income-driven repayment program would particularly help those with higher debt loads. For instance, Kirsten Trambley in New Jersey currently has more than $80,000 in federal loans from graduate school.
The 29-year-old, who works as the assistant director of theological admissions at Drew University, will have to pay about $230 a month when required payments resume. She took a second job working at her church on weekends in preparation for the looming restart date.
“The extra income was needed,” she said. “It’s manageable for now, but I can’t see myself doing this for years on end.”
--With assistance from Paulina Cachero.
This article was provided by Bloomberg News.