The end of the federal student loan payments pause is fast approaching. In just 60 days after June 30, borrowers must resume making payments while interest accumulates again. Congress has passed a provision that rules out any further extensions.
President Biden proposed a federal student debt cancellation plan of up to $20,000. But its implementation is subject to legal challenges and court rulings. Borrowers should not solely rely on the debt cancellation plan and, instead, prepare for loan repayment because Supreme Court’s decision could potentially impact the plan’s outcome.
History of Student loan payments pause
Former President Donald Trump announced the pause on federal student loan payments in March 2020. It is still active as one of the few Covid-related relief measures.
This policy has provided much-needed relief for borrowers, suspending interest accrual and penalties.
Tens of millions of Americans have actively utilized this pause, resulting in a collective saving of an average of $5,000 in interest, as calculated by higher education expert Mark Kantrowitz.
The Provision of Debt Deal affects the effective pause
The debt ceiling deal between Republican lawmakers and President Joe Biden will end the effective pause on federal student loan payments. The legislative text states that the ongoing pause on federal student loan payments, which has lasted for over three years and crossed two administrations, will no longer be effective. As a result, Borrowers must resume paying their student loan bills within 60 days after June 30.
The deal will require individuals with student loans to actively make their payments again. This change affects borrowers who have benefited from the pandemic-era payment pause.
The authority to extend this relief lies with Congress, significantly limiting the U.S. Department of Education’s ability. But the fact that only Congress can extend the pause has worried advocates, especially considering the uncertain fate of the president’s ambitious student loan forgiveness plan.
While the White House had been preparing borrowers for the resumption of payments, the Supreme Court’s decision on the debt forgiveness plan could complicate matters. Advocates fear that if the relief terminates and the Supreme Court rejects the forgiveness plan, approximately 40 million people may face the obligation to repay loans that the government had promised to cancel. This raises concerns about a potential surge in defaults and delinquencies, which the Biden administration has been cautious about.
With such high inflation and low salary, from where is that extra amount going to come? Millions of American student loan borrowers are asking the question.
Education expert Mark Kantrowitz said,
”Initially there will be chaos, but soon it will settle down.”
Due to the lack of lending precedent for such a long pause on borrower payments, there is limited evidence to predict the outcome when payments resume. However, Kantrowitz anticipates that the majority of borrowers will adapt swiftly. He states that while there may be initial chaos, it is expected to stabilize within a few months.
House Speaker Kevin McCarthy praised a clause in the debt limit agreement that officially ends the bill-holding period in September.
McCarthy remarked on Twitter,
“It also compels borrowers to be responsible for repaying their student loans once more.”
However, Persis Yu warn student loan problems are far from ending.
Persis Yu, the Deputy Executive Director of the Student Borrower Protection Center, expresses concern about borrowers’ readiness to resume payments. Yu emphasizes that despite a decrease in the risk posed by the virus, the financial aftermath is still ongoing.
Comparing the federal student loan system to the 2008 mortgage crisis, Yu points out that even before the pandemic, the system faced challenges. In 2019, only approximately half of borrowers made repayments, with a significant percentage in delinquency or default.
Yu suggests that these borrowers may be in a worse position, highlighting the critical importance of President Biden’s debt relief program. However, Yu notes that the administration has done little outreach for the program thus far.
What can be a better option
Fortunately, the agreement reached in Congress will not impact the Biden administration’s “pending regulatory changes” to student loan repayment. This includes implementing a new repayment plan, where qualifying borrowers would pay only 5% of their discretionary income towards their student debt each month. These changes aim to alleviate the burden on borrowers and make student loan repayment more manageable.
Congress must consider the implications of resuming payments without a clear path for debt forgiveness. Finding a balance between borrowers’ financial stability and the need to address the long-term sustainability of student loans remains a critical task for policymakers.