Student Loan Payments Set to Resume, Causing Concern for Borrowers.

June 27, 2023: In a few months, student loan borrowers will face the resumption of payments, leading to potential financial difficulties. After an over-three-year pause, student loan payments are set to restart this fall, making borrowers uneasy.

President Joe Biden’s Education Department recently confirmed that payments will resume in October, accompanied by interest accrual on borrowers’ balances starting in September. This decision follows multiple extensions of the pandemic-era payment pause by former President Donald Trump and Biden, providing financial relief to millions of federal borrowers.

However, with the signing of a bill to raise the debt ceiling into law in June, signaling the end of the student-loan payment pause, the White House has made it clear that another extension is unlikely. Bank of America and Morgan Stanley have expressed concerns in recent notes, highlighting the challenges that most borrowers may face, with some at risk of falling behind.

Bank of America’s Ethan Harris, head of global economics, explained that if payments were to resume in full, it could significantly increase seriously delinquent balances. This increase, amounting to $167 billion, would raise total serious delinquencies across all categories of household debt by approximately 67%, causing a sizeable shock. The effects could extend to other debt categories as well.

Morgan Stanley researchers noted that only 29% of federal student-loan borrowers are confident they can afford payments without adjusting their spending in other areas. Furthermore, 37% of surveyed borrowers anticipate the need to cut back on expenses, while 34% stated they cannot afford the payments.

As highlighted in previous reports, the student-loan payment resumption is expected to have negative economic impacts. Marshall Steinbaum, a senior fellow at the Jain Family Institute and economics professor at the University of Utah, warned that attempting to collect debt from borrowers who cannot repay would strain the economy. It would create a burdensome situation where the government tries to collect uncollectible debt and places additional pressure on borrowers.

Despite these concerns, Education Secretary Miguel Cardona expressed confidence in facilitating a smooth transition to repayment for borrowers. He emphasized the importance of providing accurate information to borrowers and ensuring a seamless reentry into repayment.

Meanwhile, borrowers await the Supreme Court’s decision on President Biden’s plan to cancel up to $20,000 in student debt. If an adverse ruling occurs, some Democratic lawmakers advocate extending the payment pause, allowing borrowers to delay repayment until their balances are reduced.

As the student loan payment pause ends, economists and advocates warn that millions of borrowers may face significant challenges. Many borrowers have accumulated more debt during the pause period, including credit card debt, auto loans, and mortgages.

Some borrowers need help to keep up with other loan payments, even before the student loan payments kick in. Additionally, changes in loan servicers may further complicate the transition to repayment.

To prepare for the resumption of student loan payments, borrowers should consider exploring options to keep their payments as low as possible. Applying for alternative repayment plans or seeking assistance from loan servicers can help alleviate the financial burden. Borrowers must stay informed and proactive during this transition period.