‘The pause has meant everything:’ What happens to borrowers — and the economy — if Biden lets student loan payments resume in September

Smith is a Texas State University lecturer for students pursuing social work degrees. She took the job after years in the typically lower-paying social work field, watching some ex-colleagues drift to more lucrative paths, like real estate. Because she works for a public college, Smith believes she will eventually qualify for a program that wipes away the federal debt of public servants after at least 10 years of payments. But in the meantime, she’s felt squeezed by her monthly student loan bill — that is, until the freeze.

“The pause has meant everything. It’s shifted and reshaped a reality for me that I never dreamed possible,” Smith said. The pandemic-era pause that began in March 2020 and was extended by both the Trump and Biden administrations freed Smith from a $268 monthly payment. It’s enabled her to pay off credit card debts, her old car and sock away money for a down payment on a condominium – no small feat for a single woman living in an expensive city.

Still, she has a side job pet sitting and she’s about to start a new one as an elementary school mentor on the bet that student loan payments are resuming.

As Smith and the 43 million other student loan borrowers wait for answers from the Biden Administration about what’s next, a debate is unfolding about the potential economic impact officials’ decision — whether it’s to restart payments, extend the pause and/or offer broad-based debt cancellation. Some economists argue that student debt relief could boost inflation by freeing up cash for borrowers to spend. Other experts counter that student loan help would likely push borrowers to save the extra funds and pay down other debt.

When reached for comment Friday, the White House pointed to comments earlier this month from press secretary Karine Jean-Pierre. There haven’t been any decisions yet on the pause or cancellation Jean-Pierre said during the Aug. 9 briefing. The president knows the financial “burden” loans can add. “He’ll have something before August 31st,” Jean-Pierre said.

Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget, worries that more relief for borrowers could exacerbate the current inflationary environment.

“Two things can be true,” he said. “Debt cancellation or a debt pause is financially good for 13% of Americans,” who did take out student loans, he said. “But it’s economically bad for the 87% if American who don’t have student loans.”

By the fourth quarter of last year, there were approximately 43.4 million student loan borrowers, according to the Federal Reserve Bank of New York. That comes to 13% of America’s 332.4 million people, which includes children, according to the Census Bureau. The largest share of borrowers, just over a quarter, owe between $10,000 and $25,000, New York Fed data shows. In a sign of the pause’s impact, more than half of student loan balances have not declined from 2019 to 2021, researchers noted.

Americans had $1.59 trillion in student loan debt as of 2022’s second quarter, New York Fed debt statistics showed.

In the near term, pauses and cancellation could contribute to inflation because that’s freeing up cash to spend, Goldwein said. Farther on, it could undercut much of the hoped-for deficit reduction in the freshly-enacted healthcare, climate and tax package, he estimated.

“We are giving more money for people to spend than the economy can produce. When people’s wealth goes up, they tend to spend a portion of their wealth,” he said.

Resuming payments by themselves aren’t going to massively puncture inflation rates, Goldwein said. In some ways, there’s only so much Biden can do to fight inflation, Goldwein said — case in point, it’s the Federal Reserve, not the president, that sets interest rate policies. But for the things the Biden administration can to fight inflation now, this is big in his view.

“They can control how much people are spending literally next month,” Goldwein noted.

That’s an unnecessary threat to the economic security of too many people, said Alí R. Bustamante, deputy director, education, jobs & worker power at the Roosevelt Institute, a progressive think tank.

Instead of sparking a spending spree, the pauses have been letting borrowers “pay off all their debts and to save,” he said. “What that actually looks like is improving their wealth and wealth is something that you can’t spend today or tomorrow. Wealth is something that you accumulate over time.”

There’s another way to think about the fairness argument on a portion of the population benefitting, Bustamante said. Higher education costs have climbed in the past two decades and “the reasons the student debt crisis exists are policy decisions” that shifted “higher education financing from states to families,” Bustamante said.

Furthermore, student debt cancellation could be especially important for Black households, Bustamante said. With the wealth gap compared to white households, Black borrowers have a greater chance to take on student debt and to borrow more money, he said.

If payments turn back on, New York Fed researchers said “many [borrowers] will decrease their balances.” But some could face delinquency or default. — just how many depends on the rules that follow, they said. If the payments resumed, New York Fed researchers estimated “lower-income, less educated, non-white, female and middle-aged borrowers will struggle more in making minimum payments and in remaining current.”

Indeed, borrowers are unevenly spread across the economy and income ladder – which adds to the complexity.

People in education and the health services industry, like Smith, were most likely to have student debt, with almost 25% owing student loans, according to the Employee Benefit and Research Institute. But fewer than 8% of workers in construction and mining, and less than 4% of people in agriculture had student loan bills hanging over their head, researchers said as they dissected 2020 Census data.

The payments may be harder to make in some industries than others. Almost two in ten workers in business and professional services had loans but their income averaged more than $84,000, researchers said. Meanwhile, people in education and health services, like teachers and nurses, earned approximately $64,500.

Payments should have resumed by now in Goldwein’s view. But with less than two weeks to go before the deadline and no clear answer from the administration, he thinks borrowers should get one final, brief extension with the clear message that payments are about to start.

The initial payment pause “was a very reasonable thing to do when the economy was in meltdown,” he said. But the picture has changed, he said, pointing to the jobs that keep getting added in the economy even as inflation runs hot. “There is no emergency right now that would require this pause to continue,” Goldwein said.

Borrowers at this point are less than one pay period away from possibly getting socked with payments by a president who made student loan debt cancellation part of his campaign, said Cody Hounanian, executive director of the Student Debt Crisis Center.

In a February survey by the organization, 92% of fully employed borrowers said they were worried about affording payments in the face of inflation.

Those results could likely be worse now, Hounanian said. “Turning on student loan payments at a time when millions of Americans say gas is too high and food is too expensive is a financial catastrophe,” he said.

Back in Texas, Smith was able to get a new car thanks in part to the freed-up income. As for her previous one, “I had basically driven it into the ground,” Smith said.

But now there’s a new car payment and the unexpected costs of paying for four new tires — all adding to the pressure that could get tighter with resumed payments. She says she gets frustrated jumping back and forth from trying to pay off debts, or building up savings.

Smith pushes back on the idea of loan forgiveness and pauses being unfair. So is underpayment of social workers, as well as the male-female pay gap, she said.

Snuffing debts, or at least pausing them more, could lighten the worries of so many cash strapped families now, she said.

“It is a taxing thing to live in America with the debt that exists right now.”