The $1.6tn student debt quandary hanging over the US economy

The fate of the American economy depends on the dynamism of the American consumer – and therein lies a mystery. Nobody really knows when the tens of millions of people with federal student loans will have to start paying off their obligations. The amounts at stake are not small – there is $1.6 billion in outstanding debt and the government has suspended collection of most of it.

The American way of financing higher education has long been a drag on the national economy. All that borrowed money is driving up the already exorbitant cost of a degree. Many students, especially in minority communities, have struggled for decades to escape the burden of their loans.

But the story took an unlikely turn during the pandemic. American student borrowers still owe a lot, but pay very little. Federal student loan forbearance programs remain in place more than two years after they were launched by the Trump administration at the start of the pandemic.

The current pause on student debt collection is set to end Aug. 31, but political watchers expect the Biden administration to issue another extension — its fifth — to avoid angering voters as it approaches. November midterm elections for control of Congress.

Whether there will ever be enough political will in Washington to move beyond the payment moratorium and replace it with policies that will hopefully make it easier for Americans to access higher education remains to be seen. without risking a shortage.

Prominent Democratic lawmakers have called for student debt forgiveness of up to $50,000 per borrower. President Joe Biden is said to favor pardons of around $10,000 each for people earning less than $125,000. Republicans oppose debt cancellation, with the party’s Senate leader Mitch McConnell calling it “a giant slap in the face to every family that has sacrificed to save for college.”

Uncertainty about the current direction of the US economy will only make the decision more difficult. Mark Zandi, chief economist at Moody’s Analytics, says high inflation is reducing the appetite for debt cancellation, while recession fears will make it harder to resume collections. In other words, this political box is going to be rejected.

“At some point, the federal government has to make a decision. This cannot continue indefinitely with a moratorium,” Zandi said. “But it feels like we’re stuck in amber on the student loan issue until the economy gets through this period of high inflation and high risk of recession.”

The stakes are high. US student debt stood at $1.6 billion in the second quarter, $700 billion more than US borrowing on their credit cards, according to the Federal Reserve Bank of New York. Most of the money is owed to the federal government.

As part of the U.S. forbearance effort, collection of federal student loan payments and accrual of interest were suspended, while delinquent loans were marked as current. New York Fed economists estimate that about 38 million borrowers have received relief and about $226 billion in loan repayments have been forgiven so far. A Philadelphia Fed report said “nearly four in five student borrowers have skipped all or part of scheduled payments since April 2020.”

The resulting improvements in consumer finances were documented in a New York Fed report released this month. It found that the credit scores of 79.1% of student borrowers increased during the pandemic, a more dramatic improvement than that seen in the two-year period before Covid-19 arrived.

Yet New York Fed economists wonder if such gains could prove short-lived. They were encouraged that some of the credit score improvements reflected reduced rates of credit card use by borrowers. On the other hand, they found that some borrowers in default experienced dramatic improvements in their scores simply because their loans were marked as outstanding under the forbearance program.

The resumption of any kind of collection of federal student loans will require authorities to act with caution. While forbearance has obviously helped borrowers, it has also obscured the struggles of many of them during the pandemic. We won’t know how they are until later.

The Philadelphia Fed economists’ report paid particular attention to “a significant share of student borrowers” who they described as “chronically distressed.” Many of these individuals have taken on student debt but have not graduated or found employment in their area of ​​specialization.

“Borrowers with chronic repayment difficulties benefit from automatic forbearance,” observed the report’s authors, “but our survey responses suggest that for most of these borrowers, forbearance merely postpones a day of judgement”.

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