How Restarting Student Loan Payments Could Change Millions of Lives — And The Economy

When Congress voted in May to restart student loan payments this fall — and then the Supreme Court overturned President Biden’s student loan forgiveness plan in June — Alexa Goins and her husband realized they had a choice: They could keep their house or they could pay off their student debt. Together, she and her husband owe $41,000 in student loans — she had borrowed for her undergraduate education, and he borrowed for another program. He is currently between jobs, looking to break into the tech industry, so they’re living off Goins’s $80,000 per year salary as a senior writer at an ad agency. “We’re kind of living paycheck to paycheck right now,” said Goins, now 29. Her husband bought the Indianapolis house they live in before their marriage, and they were thinking of leaving the city in a year or two anyway. But it was the impending resumption of payments and the demise of Biden’s program — which would have canceled up to $20,000 in debt for an estimated 16 million borrowers, including Goins — that made up their minds. “Just knowing that we’re going to have an extra burden … we just decided, now’s the time to sell so that we can finally have no debt,” she said. Renting, debt-free, feels like a safer bet right now. In October, student loan borrowers like Goins and her husband will be on the hook for payments for the first time since 2020. When the pandemic hit, the Department of Education automatically paused student loan payments for all borrowers and suspended interest. The policy got extended, and then extended again, so that for three years, borrowers were allowed to skip payments and avoid defaults, without seeing their balances grow. The pause had a major impact: Student loan debt is the second-biggest consumer debt category after mortgages, with the total amount of debt now approaching $1.8 trillion. Not having to make payments kept borrowers — and the overall economy — afloat in what could have otherwise been a dramatic recession during the COVID-19 pandemic, allowing them to avoid catastrophe if the pandemic put them out of work or spend their money in other ways. Now that respite is about to end. And it’s coming at a precarious time for the American economy. It’s not all bad news: Forecasters have just started to brighten their gloomy predictions about an impending recession and some borrowers used the pandemic to pay down debt, leaving them in a stronger financial position. The Biden administration has introduced a new program that will discharge the loans of more than 800,000 borrowers who were on income-driven repayment plans and reduce the monthly payments of many who still owe. But tens of millions of people will have another bill to pay, and they’re not all coming out of the pandemic better off. The average student debt payment is significant — hundreds of dollars per month, according to The Federal Reserve Bank of New York. And some people are in more debt than ever before, and are still paying more for everyday goods — including food and rent — than they were before the pandemic. That could add new strains to family budgets and force some borrowers, like Goins, to make big financial sacrifices or risk defaulting. “The repayment pause has really been such a reprieve for borrowers, and that has ripple effects throughout the economy,” said Laura Beamer, the lead researcher of higher education finance at the nonpartisan, left-leaning Jain Family Institute. “What we’re worried about when the payment pause ends is that we go back to this pre-COVID trend of ever-increasing balances, not being able to make ends meet, going back to the status quo of lower homeownership rates, and higher delinquency and default rates.” For some borrowers, the three-year payment pause was exactly what they needed to get their student loan debt under control. One was Kevin Taylor, 46, who lives in central Michigan. He first earned an associate degree in 2000, and worked a series of odd jobs until he was laid off from a steel firm, where he was helping to run the website, during the Great Recession. Hoping to enter a more stable career track, he went back to school to earn a bachelor’s degree in information systems and graduated in 2012. By the time he was done, he’d borrowed $48,000 in student loans. Like many borrowers, he struggled to make payments on his loans in the beginning of his career, when his salary was low. He chose a graduated repayment plan, which meant he wasn’t paying enough to keep up with interest and his balance grew. But the pandemic hit at a moment when he was doing better financially, and he decided to keep sending in money even while repayments were paused. Because no interest was charged during that time, all of his payments were applied toward the principal, which meant he was actually digging himself out of debt. “I finally actually saw my balance go down for the first time in my life,” he said. Student debt has been a ballooning problem for a while. In the 10 years before the pandemic, the total amount of student debt had more than doubled. About half of students who enrolled in a degree program after high school took out student loans. (That number dropped in recent years, to 38 percent in the 2020-2021 academic year, the first full year of the pandemic.) By 2019, it was clear that many borrowers were in trouble: Nearly one in five were behind on payments. The average payment for borrowers is around $300 a month, ranking just below the monthly payment for a car in many households, but some (like Taylor, who will owe $550 a month) pay much more. The debt these borrowers carry makes it harder for them to invest in other things. Student debt accounted for about 20 percent of the decline in homeownership among younger adults, according to a 2019 report from the Federal Reserve, and borrowers contribute an average of 6 percent less to savings for retirement than people without student loan debt, according to a report from Fidelity Investments. The student loan repayment pause wasn’t designed to directly address any of these issues. Instead, it was an emergency measure implemented by the Trump administration to stabilize the economy during the early stages of the COVID-19 pandemic, when unemployment spiked to nearly 15 percent. But it ended up being a kind of experiment: What happens if borrowers suddenly have more money to spend every month? The government paused payments for four kinds of consumer debt: mortgage, student loan, auto and credit card debt. To take advantage of the pause, most borrowers had to ask their lenders for it if they needed it, said Erica Jiang, an economist at the University of Southern California Marshall School of Business. By contrast, student loan debt forbearance was automatic, and the government took the unusual step of setting the interest rate to zero on those loans so that borrowers’ balances wouldn’t grow. Jiang said policymakers wanted to avoid a repeat of the 2008 housing market crash and the Great Recession by instituting the temporary forbearance policy. It worked. “If we compare this crisis with the financial crisis, in ‘08 and ‘09, during that period, we saw a huge spike in delinquency and foreclosures,” Jiang said. That led to a cascade of negative effects for neighborhoods and the economy as a whole. “And [during the pandemic], we didn’t see that at all,” she said. A National Bureau of Economic Research paper by Michael Dinerstein, Constantine Yannelis and Ching-Tse Chen, economists from the University of Chicago, found that temporarily allowing people to stop paying off their loans helped the post-COVID recovery gain steam. But there were also limits to how much the pause could help individual borrowers, because it wasn’t designed to outlast the pandemic. And while the pandemic was good for some people financially — wages grew for low- and middle-income earners at historically high rates — it created some serious headwinds for others. Inflation peaked at 9.1 percent last summer, and remains…