Resuming Student Loan Payments May Hurt US Economic Recovery

• Author: Monica Jackson
• Posted: 2024-07-29

To fight theCOVID-19 pandemic, the US government paused loan payments and interest on federal and federally-guaranteed student debt. The national government instituted the pause in payment obligations to protect families during the economic downturn caused by federally-imposed economic shutdowns and restrictions. Because people could not work in jobs closed for public safety, the government decided to stop payments, interest, and collections on federal student loan debt.

Designed as temporary relief, the pause in student loan repayments had a specific end date. The government extended the end date through January 2022. Under current authority, student loan repayments will begin on February 1, 2022. Some Democratic lawmakers urge action to extend the pause and go further to cancel student debt.

Millions of Americans Will Resume Student Loan Payments

Student debt affects millions of American families. Student borrowers used federally-guaranteed loans to seek and obtain higher education. While student borrowers achieved educational goals, the job markets have often failed to provide high-paying jobs for graduates. For low-to-moderate income borrowers and their families, terms of repayment were burdensome. Studies have acknowledged the impact of student debt on families and the overall US economy. The student debt totals are in the staggering range of $1.86 Trillion owed by about forty-five million debtors.

Economists agree that the impact of the enormous amount of student debt negatively affects groups,individuals, and the overall economy. For example, student debt contributes to more young adults living with parents. The financial burden of monthly payments interferes with forming young families. Student debt affects family planning and adds difficulty in buying big ticket items like cars and homes.

Congressional Democrats Send Letter

Senate Democratic leaders joined a number of outspoken House members demanding substantial action. On December 8, 2021, Senator Schumer sent a letter to the President urging action to continue the pause and consider cancelling student debt. Consumer advocate Senator Elizabeth Warren joined the letter from the Senate Majority Leader. On the House side, Representative Ayanna Pressley added her support for debt cancellation and continuing the suspension of loan repayment.

The pause in student loan repayment is popular with the indebted students and their families. Non-profit organization surveys suggest that the average repayment terms are about $390 per month. The concerned congress members urge action because withdrawing this amount from the US economy would affect the rate of recovery. The letter from Senate Democrats to President Biden offered evidence of the impact on the economy. According to studies cited, on February 1, 2022, 18 million borrowers would begin repaying $7.12 billion per month. The annual total would represent an $85 Billion impact over the following year.

Does the Pause Hurt Or Help?

The US government paused student loan interest and payments in March 2020. The pause sought to help families affected by the COVID-19 economic shutdown. The government extended the pause, but it will expire on February 1, 2022, without further action. The reduction of financial obligations helped financially-challenged families weather the economic downturn caused by COVID-19 policies.

The web of student debt and collections have entangled borrower households in a seemingly intractable situation. The pause offered relief and a chance to make economic gains. Without the drain of student loan repayments, Congressional leaders fear that borrowers and their families will experience money problems.

During the pause, economically-challenged borrowers were able to spend, save, and improve economic security. The restart of student loan payments will diminish economic prospects for borrowers with low or moderate levels of family income.

Who Benefits from Cancelling or Postponing?

When deciding whether to cancel student debt, leaders must consider the costs and benefits. Student families clearly benefit from loan cancellation. The benefits to the indebted families are immediate and clear. The economic impacts include more spending, increased savings, and greater financial security among families with student debt.

Critics of the policy cite loan debt as an incentive to work and produce wealth. Because forgiveness would apply to all debtors, many beneficiaries will be people with high incomes and with no demonstrated difficulty in making student loan payments.

What Will Happen on February 1, 2022?

While the discussion intensifies in the national government, families must prepare for the start of payments. On February 1,2022, the payment clock will resume, and many families will pay student dent rather than spend or save. While reducing household debt contributes to the overall strength of the economy, the reduction in potential spending will impact the efforts to increase economic activity and jobs.

The government has not announced a change in the February 1, 2022, repayment date. However, the intensity of concern from lawmakers and the public suggests that the situation has not been finally determined.