Client Question: Student Loan Payments

June 21, 2023

If you have federal student loans (like my client’s son does), you may be wondering when (or if) payments will resume after a three-year pause (originally put in place during COVID) This pause also included a moratorium on interest accruals. The short answer – payments are coming back – and soon.

Recently, the Department of Education announced that payments will resume in October referring to recent action taken by Congress. Its website reads: Congress recently passed a law preventing further extensions of the payment pause

The resumption of payments was included in the debt ceiling negotiations and requires the pause to end no later than August 2023. The Department of Education has noted first payments will be due in October and interest will resume its accrual in September. Exact dates will vary by loan.

This will be a big change for many Americans, as it is estimated that 40 million have student loans, with the average monthly payment roughly $350.

The pause resulted in an astonishing estimated $185 billion being redirected to other areas – instead of student loan payments. Another (perhaps unintended consequence) was many student loan borrowers took on higher levels of debt elsewhere, due to credit scores improving (with student loans no longer appearing as delinquent) and due to added cash flow to support other loans (with the “savings” from no student loan payments).

Given all these factors, many fear the resumption of payments will have ripple effects on the economy (as the funds to pay these loan payments will require lower spending elsewhere). Others are very fearful that delinquencies and defaults will skyrocket as borrowers won’t have funds to service other debt they’ve added during the pause, as well as the student loan balance.

There is one potential saving grace that remains a very large unknown for student loan holders – the status of President Biden’s proposed student loan forgiveness. The Supreme Court is expected to rule on the proposal in the coming month. The forgiveness (up to $20,000 per borrower) would be very meaningful and is likely to impact over 37 million borrowers, with a third of those eliminating their entire balance with the proposed forgiveness.

Lots remains up in the air as it relates to the “switch” being turned back on for student loans. One thing is for sure – the pause is ending soon. If you or anyone you know has student loans, it’s worth taking a look at your budget now and factoring in those payments in the very near term.

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