“The pause meant everything: ‘What happens to borrowers — and the economy — if Biden lets student loan repayments resume after Aug. 31?

There are less than two weeks left until the final pause on federal student loan repayments expires on August 31.

No need to tell Cassie Smith.

The possibility of restarting payments is “a looming rain cloud hanging over my head every day,” says Smith, 33, a college professor living in Austin, Texas, with student loan debt. of $52,000 pending.

Smith is a lecturer at Texas State University for students pursuing a degree in social work. She took the job after years in the typically lower-paying field of social work, watching some ex-colleagues drift into more lucrative paths, like real estate. Because she works for a public college, Smith believes she will eventually qualify for a program that erases federal debt from public servants after at least 10 years of payments. But in the meantime, she felt stuck with her monthly student loan bill – that is, until the freeze.

“The break meant everything. It changed and reshaped a reality for me that I never imagined possible,” Smith said. The pandemic-era hiatus that began in March 2020 and was extended by the Trump and Biden administrations released Smith from a monthly payment of $268. It’s allowed her to pay off her credit card debt, her old car, and save money for a down payment on a condominium — no small feat for a single woman living in an expensive city.

Still, she has a side job babysitting and she’s about to start a new one as an elementary school mentor betting student loan repayments pick up.

As Smith and the other 43 million student borrowers wait for answers from the Biden administration on what’s next, a debate is unfolding over the potential economic impact of officials’ decision – whether to restart payments , to extend the break and/or to offer broad-based debt cancellation. Some economists argue that student debt relief could spur inflation by freeing up money for borrowers to spend. Other experts counter that student loan assistance would likely push borrowers to save the extra funds and pay off other debts.

When reached for comment on Friday, the White House pointed to comments earlier this month from press secretary Karine Jean-Pierre. There has been no decision yet on whether to pause or cancel, Jean-Pierre said during the Aug. 9 briefing. The president knows that financial “burden” loans can add up. “He will have something before August 31”, said Jean-Pierre.

Marc Goldwein, senior vice-chairman of the Committee for a Responsible Federal Budget, worries that more relief for borrowers could worsen the current inflationary environment.

“Two things may be true,” he said. “Debt cancellation or a suspension of debt is financially good for 13% of Americans,” who have taken out student loans, he said. “But it’s economically bad for the 87% of Americans who don’t have student loans.”

In the fourth quarter of last year, there were about 43.4 million student borrowers, according to the Federal Reserve Bank of New York. That’s 13% of America’s 332.4 million people, including children, according to the Census Bureau. The largest share of borrowers, just over a quarter, owe between $10,000 and $25,000, according to New York Fed data. In a sign of the impact of the pause, more than half of student loan balances did not decrease from 2019 to 2021, researchers find Noted.

Americans had $1.59 trillion in student loan debt in the second quarter of 2022, according to New York Fed debt statistics show.

In the short term, pauses and cancellations could contribute to inflation because it frees up money to spend, Goldwein said. Moreover, it could undermine much of the deficit reduction hoped for in the recently adopted health, climate and fiscal package, he estimated.

“We give people more money to spend than the economy can produce. When people’s wealth increases, they tend to spend some of their wealth,” he said.

Resuming payments by itself is not going to massively affect inflation rates, Goldwein said. In some ways, Biden can’t do much to fight inflation, Goldwein said — for example, it’s the Federal Reserve, not the president, who sets interest rate policies. But for what the Biden administration can do to fight inflation now, it matters to him.

“They can control how much people literally spend next month,” Goldwein noted.

It’s an unnecessary threat to the economic security of too many people, said Alí R. Bustamante, deputy director, education, jobs and worker power at the Roosevelt Institute, a progressive think tank.

Instead of triggering a spending spree, the breaks allowed borrowers to “pay off all their debts and save”, he said. “What it actually looks like is to enhance their wealth and wealth is something you can’t spend today or tomorrow. Wealth is something you accumulate over time.

There’s another way to think about the equity argument on a portion of the population that benefits, Bustamante said. Higher education costs have risen over the past two decades and ‘the reasons the student debt crisis exists are political decisions’ that shifted ‘higher education funding from states to families’ , said Bustamante.

Also, canceling student debt could be especially important for black households, Bustamante said. With the wealth gap compared to white households, black borrowers are more likely to take on debt and borrow more money, he said.

If payments resume, New York Fed researchers said that “many [borrowers] reduce their balances. But some might face delinquency or default. — how much depends on the following rules, they said. If payments resumed, New York Fed researchers valued “Lower-income, less-educated, non-white, female, and middle-aged borrowers will have a harder time making minimum payments and staying current.”

This is because borrowers are unevenly distributed across the economy and income scale, adding to the complexity.

People working in education and health services, like Smith, were the most likely to have student debt, with nearly 25% owing student loans, according to Employee Benefit and Research Institute. But less than 8% of construction and mining workers, and less than 4% of people working in agriculture had student loan bills hanging over their heads, researchers said while dissecting census data. of 2020.

Payments can be harder to make in some industries than others. Nearly two in ten workers in business and professional services had loans, but their income averaged more than $84,000, the researchers found. Meanwhile, people working in education and health services, such as teachers and nurses, earned about $64,500.

Payments should have resumed now according to Goldwein. But with less than two weeks until the deadline and no clear response from the administration, he thinks borrowers should get a final, brief extension with a clear message that payments are about to start.

The initial payment pause “was a very sensible thing to do when the economy was in a slump,” he said. But that has changed, he said, pointing to the jobs that keep being added to the economy even as inflation peaks. “There is no emergency right now that would require this pause to continue,” Goldwein said.

At this point, borrowers are less than a pay period away from possibly getting paid by a president who has made student debt forgiveness part of his campaign, said Cody Hounanian, executive director of the Student Debt Crisis Center.

In a February survey by the organization, 92% of borrowers in full employment said they feared being able to pay in the face of inflation.

Those results could likely be worse now, Hounanian said. “Activating student loan repayments at a time when millions of Americans are saying gas is too high and food is too expensive is a financial disaster,” he said.

Back in Texas, Smith was able to get a new car thanks in part to the freed-up earnings. As for his previous one, “I had basically driven it into the ground,” Smith said.

But now there’s a new payment for a car and the unexpected costs of paying for four new tyres, adding to the pressure that could tighten as payments resume. She says she is frustrated trying to pay off debts or accumulate savings.

Smith brushes off the idea of ​​loan forgiveness and stops being unfair. The same goes for the underpayment of social workers, as well as the gender pay gap, she said.

Stifling debts, or at least suspending them further, could now ease the worries of so many cash-strapped families, she said.

“It’s a trying thing to live in America with the debt that exists right now.”

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