End Of Student Loan Freedom: Impact On Bounced Checks

Borrowers must get ready for the start of monthly payments as the student loan debt cliff threatens to topple President Biden’s historic forgiveness program.

Why it matters:  For the millions of Americans who owe more than $1 trillion in student loans and are preparing for the end of a sizable pandemic-era reprieve, experts foresee a rocky resumption to debt repayment.

• According to a May memo from Bank of America seen by Markets Insider, around 30 million borrowers must pay between $200 and $400 monthly after the pause ends.
• According to data released by the Consumer Financial Protection Bureau last week, more than 1 in 13 debtors are behind on other debts. That represents an increase in delinquencies from before the pandemic.

• CFPB reports indicate that approximately 1 in 5 debtors possess “risk factors” that heighten their likelihood of struggling once payments resume.

Driving the news: A Department of Education spokeswoman emphasized Monday in a statement to Axios that student loan payments will resume in October and interest will resume in September.

“From the student perspective, it’s going to be chaotic,”  Executive director of the Marriner S. Eccles Institute at the University of Utah and nonresident senior fellow at Brookings, Adam Looney, told Axios.

• “I think there’s gonna be a lot of people who are confused and upset and there’s gonna be a lot of bounced checks.”

The big picture: Millions of Americans are now in financial uncertainty due to Biden’s comprehensive student debt reduction proposal, which he revealed last summer but was almost immediately greeted with legal and political resistance, jeopardizing one of his central campaign pledges.

Axios shared a tweet about the same incident on its official Twitter handle:

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End of student loan freedom could spell “a lot of bounced checks” https://t.co/z7URvFLmIO

— Axios (@axios) June 12, 2023

• On the verge of the Supreme Court’s decision on the comprehensive program, anticipated later this month, those challenges have only grown more severe.
• Biden’s proposal would reduce student debt by up to $20,000 for Pell Grant recipients and up to $10,000 for individual borrowers who earn less than $125,000 annually.
• A debt relief plan that Biden signed into law earlier this month included a clause halting the suspension of student loan repayments and prohibiting the administration from enacting further extensions.

The Senate recently passed legislation to destroy Biden’s idea in a largely symbolic measure, dealing another symbolic blow to it in the public eye. Wednesday saw the bill’s veto by Biden.

• During oral arguments earlier this year, the high court, which has a 6-3 conservative majority, also appeared to be leaning toward scrapping the proposal.

Flashback: Since March 2020, when former President Trump ordered the first of numerous pauses throughout the pandemic, student loan repayments have been put on hold.

State of play: Bank of America warned about the possibility of delinquencies in other areas, such as credit card bills and personal loans, as payments are about to begin.

• “The resumption of a monthly obligation that has been suspended for three plus years could pressure consumer finances and weaken credit performance on other loans,”  According to Insider, Bank of America stated in its May note.
• The restart of payments has drawn criticism from Natalia Abrams, president of the Student Debt Crisis Centre, who claimed it might lead to a “financial disaster” for debtors.
• “Whether it is the long-term economic harm caused by the pandemic, or the failure of student loan servicing companies to inform borrowers of their rights, borrowers face a number of obstacles that will make the end of the payment pause a financial disaster,”  In a statement, Abrams stated.

The bottom line: The second-largest consumer debt obligation is school loans, and according to Looney, “the historical record is that the delinquency rates of student debt are pretty high.”

• “I think the fact that it’s become so politicized has made some borrowers feel like this is an especially odious form of debt.”