The $1.6 trillion student debt dilemma hanging over the US economy

The $1.6 trillion student debt dilemma hanging over the US economy

The fate of the American economy depends on the vitality of the American consumer, and therein lies a mystery. No one knows exactly when the tens of millions of people with federal student loans will have to start repaying their obligations. The amounts involved are not small: there is $1.6 trillion of this debt outstanding, and the government has suspended collection of much of it.

The American way of financing higher education has long been a drag on the country’s economy. All that borrowed money adds to the already exorbitant cost of a degree. Many students, especially in minority communities, struggle for decades to escape the burden of loans.

But the story has taken an unlikely turn during the pandemic. US student borrowers still owe a lot, but pay very little. Federal student loan repayment programs remain in place more than two years after the Trump administration started them in the early days of the pandemic.

The current pause in student debt collection is scheduled to end Aug. 31, but political observers expect the Biden administration to issue another extension, a fifth, to avoid upsetting voters ahead of the midterm elections November mandate for the control of the Congress.

It’s unclear whether there will ever be enough political will in Washington to move beyond the tuition moratorium and replace it with policies that will hopefully make it easier for Americans to obtain higher education without risking poverty.

Prominent Democratic lawmakers have called for student debt cancellation of up to $50,000 per borrower. President Joe Biden is said to favor forgiving about $10,000 each for people making less than $125,000. Republicans oppose the debt cancellation, with the party’s Senate leader, Mitch McConnell calling him “A giant slap in the face to every family that sacrificed to save for college.”

Uncertainty about the current direction of the US economy will only make the decision more difficult. Mark Zandi, chief economist at Moody’s Analytics, says high inflation is dampening appetite for debt forgiveness, while fears of a recession will make it difficult to revive collections. In other words, this political can will be kicked out.

“At some point, the federal government has to make a decision. It can’t continue with a moratorium forever,” Zandi said. “But it looks like we’re stuck on the student loan issue until the economy goes through this period of high inflation and high risk of recession.”

The stakes are high. US Student Loan Debt stood at $1.6 billion in the second quarter, or $700 billion more than Americans borrowed from their credit cards, according to the Federal Reserve Bank of New York. Most of the money is owed to the federal government.

Under the US forbearance effort, the collection of federal student loan payments and the accrual of interest was suspended, while delinquent loans were marked as current. Economists at the New York Fed estimate that about 38 million borrowers have received relief and about $226 billion in loan payments have been waived so far. A Philadelphia Fed Report said that “nearly four out of five student borrowers have missed some or all of their scheduled payments since April 2020.”

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The resulting improvements in consumer finances were documented aa New York Fed report published this month. It found that the credit scores of 79.1 percent of student loan borrowers increased during the pandemic, a more dramatic improvement than in the two-year period before the arrival of Covid-19.

However, economists at the New York Fed wonder if these gains could be short-lived. They were encouraged that some of the credit score improvements reflected lower credit card utilization rates by borrowers. On the other hand, they found that some delinquent borrowers saw dramatic improvements in their scores simply because their loans were marked current under the compensation program.

Resuming federal student loan collections of any kind will require authorities to move carefully. While the forbearance has obviously helped borrowers, it has also obscured the struggles of many of them during the pandemic. Only later will we find out how they are.

The report by Philadelphia Fed economists paid particular attention to “a significant portion of education borrowers” which they described as “chronically struggling.” Many of these people took on student debt but were unable to obtain a degree or find work in their field of specialization.

“Borrowers with chronic repayment challenges benefit from automatic forgiveness,” the report’s authors noted, “but our survey responses suggest that for most of these borrowers, forgiveness is simply postponing a day of reckoning”.


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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!