Student loan bills might not hit as hard as some predict

Sabrina Calazans, the managing director of the Student Debt Crisis Center, made a promise to the crowd gathered in front of the Supreme Court on June 30: Advocates for student debt forgiveness weren’t going to back down.

“Our members will continue to raise our voices to ensure borrowers gain access to the relief they deserve,” she said. “We will mobilize to vote Republicans out next November.”

Just after the Supreme Court announced its decision to strike down President Joe Biden’s plan to forgive student debt, Calazans told me the issue will play a significant role in the 2024 elections. But she sees loan relief as more than a political issue.

She thinks the Supreme Court has set the stage for financial catastrophe, with millions of borrowers shouldering a financial burden they haven’t felt in three years.

In March 2020, President Donald Trump paused payments on federal student loans in the face of the COVID-19 pandemic. But now the pandemic is over, and payments are coming back.

“So the payment pause is set to end on Aug. 31 with interest resuming, but then the real bills come Oct. 1,” Calazans said. She added that former students are already struggling financially.

“They’re going to really be scrambling to not fall into default or be financially harmed. There’s a lot of budgeting that’s going to be happening,” Calazans said.

The Biden administration has already taken steps to soften the blow.

Through the administration’s Saving on a Valuable Education plan or SAVE, Biden hopes to make payments easier by providing a gradual payment ramp starting in October and running through September 2024. During that time, students who fall behind on their payments won’t be penalized. Borrowers with undergraduate degrees will be asked to pay 5 percent of their discretionary income. And the definition of “nondiscretionary” spending has also been expanded. The plan won’t apply to graduate borrowers or borrowers who made use of Parent PLUS Loans.

The changes mean that some students won’t have to pay anything on a monthly basis—for now. The rate of payment depends on a borrower’s individual financial situation.

Jared Pincin, a professor of economics at The King’s College, said the ramp would help—but not completely eliminate—the economic turbulence ahead. He said to expect an increase in defaults: “Any type of bill that you didn’t have to pay that you’re paying again … there are going to be people that miss that.”

But at the same time, Pincin said, proponents of debt relief exaggerate the size of the problem. He doesn’t see the same doomsday scenario described by Calazans. Many students will pay $75 or $150 a month.

“You’re going to see a reallocation of resources,” Pincin said. “Instead of maybe going out a few times a month, maybe you’re using that money to pay back your loans. For very few borrowers I’d imagine that’s rent money coming out.”

The size of the payments also likely will not have a macroeconomic effect on the Federal Reserve’s struggle against inflation, Pincin said, because student debt is not a large enough component of the country’s economic engine. Even if Biden’s entire forgiveness plan were crammed into one year, it would only make up a fraction of the country’s economic production.

“When your economy is $23 trillion, [$430 billion] isn’t all that large,” Pincin said.

Instead of forgiveness, Pincin suggested the best way to help students might be to stop them from getting into unmanageable debt in the first place. Students have a tendency to borrow without understanding the burdens debt can bring. He pointed to the 2008 housing crisis when many borrowers similarly bought houses—sometimes several—without a real understanding of what they were doing.

For now, Pincin believes the Biden administration needs to focus on getting its message of payment plans out to qualifying students: “You have people who are already on lower incomes who tend not to navigate this complexity as well. The administration and the Department of Education need to do a much better job on that.”