Jun 24, 2021 - Economy

The clock is ticking on student loan repayments

Data: New York Fed Consumer Credit Panel/Equifax; Chart: Axios Visuals
Data: New York Fed Consumer Credit Panel/Equifax; Chart: Axios Visuals

The government paused federal student loan payments during the pandemic — but come September, borrowers are supposed to start paying again. Both they, and the infrastructure to support repayments, might not be ready.

Why it matters: Americans owe a whopping $1.6 trillion in student loans. The respite has provided enormous relief, to the tune of around $14 billion per quarter to over 40 million borrowers.

  • Crushing student loan debt was the brewing "crisis before the crisis." Heavily indebted graduates have trouble buying a home or even building a financial safety net.

The student loan problem is not just a student loan problem. "Someone who's struggling to repay their student loans is very likely not only struggling there," says Sarah Sattelmeyer, project director at think tank New America’s higher education program.

Threat level: The lion’s share of delinquent borrowers have historically been students who racked up debt but didn’t actually finish their degree, according to Mark Kantrowitz, author of How to Appeal for More College Financial Aid.

  • And the pandemic caused many students to take a year off, rather than pay for remote classes. Some of those those students may not return, but will still owe money on the debt they already took out.

State of play: The federal student loan pause started in March 2020 as part of the CARES Act. It's been extended three times already, and lawmakers have urged President Biden to extend it again.

Yes, but: The uncertainty over when the freeze will actually end is part of the problem.

  • Loan servicing companies need lead time to revamp staffing and ensure up-to-date info on borrower addresses and bank account info.
  • And borrowers must receive six notifications of their new payment due date, before payments kick back in, under the terms of the CARES Act.
  • And loan borrowers themselves need clarity. A Pew survey published late last year showed a high degree of confusion among student loan borrowers about how the payment pause affected them.

Catch up quick: When the pause rolls off, borrowers can defer their payments temporarily by proving economic hardship or unemployment. They can also seek income-based repayment, which is a plan that can reduce monthly payments by tying them to a borrower's earnings.

  • But those processes can be onerous, and often the people who need them most aren't able to complete them, Sattelmeyer says.

The bottom line: "For some people, the pandemic really caused insecurity, but for many, the pandemic exacerbated and pulled the curtain back on financial insecurity that has been going on for decades," she says.

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