Student Loan Payments Begin Again: What does that mean?
The student loan debt balance in the U.S. has increased by 66% over the past decade, totaling more than $1.77 trillion, according to the Federal Reserve. The most recent data available from the 2020-2021 school year shows that more than half of bachelor’s degree students who attended public and private four-year schools graduated with student loans. These students left school with an average balance of $29,100 in education debt, according to the College Board.
Starting October 1st 2023, individuals who have outstanding student loans are now expected to resume payments on those loans. Remember that during the COVID pandemic, payments and interest on federal student loans were paused, meaning that borrowers did not have to make any payments. Borrowers had hoped for an extension to the student loan debt forgiveness plan that was announced in August 2022 but a key provision in the debt ceiling agreement reached in June of 2023 prohibited the US Department of Education from extending the pause on repayments of student loans that began in March 2020. As a result of this debt ceiling deal, student loan repayments began on October 1st for most borrowers.
There are only three instances when the new rules do not apply.
If you are enrolled at least half time in school, you won’t be required to make payments on your federal loan unless you leave school. Even if you aren’t in school, you won’t have to make payments if you are still in the grace period which is typically 6 months from the time you left school. There is one twist however for those with a Perkins Loan. Instead of this 6-month grace period, you have nine months.
If you have received deferment or forbearance that delays your payments beyond October 2023, you won’t have to immediately resume payments. You can request a forbearance for several reasons including encountering financial difficulties, having to pay medical expenses or changing employment. Note however that interest will always accrue on loans in forbearance but might not accrue for certain types of federal loans in deferment.
President Biden’s ‘Saving on Valuable Education’ or SAVE Plan reduces loan payments for many, as it is based on income. In some instances, the repayment amount will be zero if your adjusted gross income is no more than 225% of the poverty level.
If you have student loans but don’t qualify for an exception, you should at least consider enrollment into auto pay. This can reduce your interest rate by up to 0.25%. If you were enrolled before, do not assume you are still automatically enrolled. Go to your service’s website and verify.
What impact might the resumption of student loan payments have on the broader economy? Well, no one knows for sure, but it is very possible that this has a slowing effect on the US economy. Remember that about 70% of US economic growth is driven by consumer spending. If consumers now must work student loan repayments into their monthly budgets again, this can certainly reduce the amount of monthly surplus that many households have to spend on other discretionary things, which in turn could certainly slow down the economy. The extreme of this impact would potentially bring on a recession sooner than might otherwise would have happened. We will have to wait and see whether the resumption of student loan repayment triggers a rise in delinquencies and defaults on these loans, as households grapple to come up with the money to pay these loans.
Thank you for watching. If you have any questions about your student loans, or any other financial planning question, feel free to reach out to us today at 518 406 5624, or visit our website at simmonscapitalgroup.com