As a first-generation college student, Becky Divine’s family encouraged her to pursue higher education. To do so, she had to take out student loans before graduating from Metro Business College in 2012.
As a massage therapist, Divine’s work was ravaged by the COVID-19 pandemic. That, combined with the death of her partner in 2019 that left her a single mom, compounded Divine’s financial stress, which was partially eased by a federally mandated freeze on student loan payments.
Now, as student loan payments are set to resume this fall, she is fretting about how her family will repay more than $41,000 in student debt.
“We’re just hovering right above that poverty line, and if I am made to pay my student payments, it’s just really gonna just drive us down deeper,” Divine said. “It’s just a slow time with massage right now… I’m hoping it might pick up but it’s just with the economy, it’s not looking very good.”
The current freeze on student loan payments began in March 2020 under former President Donald Trump. But it will soon come to an end under the new debt ceiling bill signed by President Joe Biden earlier this month, which also deferred the federal debt limit for two years and suspended the $31.4 trillion borrowing limit until January 2025.
The new legislation, known as the Fiscal Responsibility Act of 2023, says that “Sixty days after June 30, 2023, the waivers and modifications (on student loans) shall cease to be effective.”
As a result, once the pause ends, interest on loans will begin to accrue again in September and payments will resume in October.
More than 43 million people have student loan debt, and the average borrower owes $37,338, according to Federal Student Aid, part of the U.S. Department of Education. The Federal Reserve now pegs total student loan debt at nearly $1.8 trillion.
“Obviously, getting a little bit more money in from the student loans will help. But it’s kind of like: ‘The house is on fire. Hit it with a squirt gun.”Chris Kuehl, managing director of Armada Corporate Intelligence
Target Corp. already is warning about changes in spending habits, as the majority of the retailer’s sales come from purchases of discretionary products. The student loan payment changes also come at a time when Target’s demand may be softening and the company saw a surprise decrease in online sales last quarter.
“Target over-indexes to the millennial customer and, should student loan payments come back on, the company is more exposed than others in our coverage,” wrote JPMorgan analyst Chris Horvers in an investment note.
As for Annie Edgeller, an incoming senior at the University of Kansas, her family took out the smallest possible loan her freshman year to ease the financial burden of college.
But as her family continues adjusting to the pandemic’s impacts and recent family shifts, they knew they had to take out more loans to support Edgeller through her senior year while her two younger brothers start college.
“(My family is) very fortunate to be where we are, but we don’t have buckets of money to just, like, pay for three kids’ college tuitions right out of nowhere,” Edgeller said. “We’re kind of interested to see just how it will end up going. And we’re nervous, but we’re kind of just like well, you know, we’ll figure it out.”
George Thomas, a bankruptcy lawyer at Phillips & Thomas in Leawood, said resuming student loan payments could push borrowers deeper into financial troubles, potentially leading some to seek out services from lawyers.
“There really is no one-size-fits-all (solution),” he said. “But I think certainly we can say that when you add another item to your monthly budget, it’s a burden on people, especially in today’s climate.”
More people may begin turning to bankruptcy lawyers as a result of this change, Thomas said, as there will “be people on the margins where having to resume the student loan payment is going to push them… over the edge.”
However, there will likely not be a huge rush of people to lawyers’ offices once new rules take effect, as bankruptcy is often a last resort option.
Kuehl said it is also important to consider the broader impacts of changes in spending habits and the way people are held accountable for paying back loans. He said two questions loom large.
“One is, ‘What is it going to do to the spending habits of those consumers if the more people have to deal with their debt, the less they can spend?’ But then there’s the whole issue of, ‘What message are you sending if people borrow and then don’t have to pay the money back?’” Kuehl said.
Divine said she wishes the government would provide more support or additional payment options to assist people like her, like making it easier to pursue debt forgiveness or offering an income-driven repayment plan, which she used in 2019.
“I’ve gone to school and for the past 11 years, I’ve stayed in my career, and that’s been great. But I’ve never been able to get to a stable spot where I can really pay on my loans, which is disappointing,” she said.
President Biden also created a debt cancellation plan last August to forgive up to $20,000 in debt for borrowers making less than a certain income, though the Supreme Court is widely expected to strike down this plan. The current debt ceiling legislation only requires ending the pause on payments and does not address Biden’s debt cancellation plan.
Brad McCormack, a partner at Sader Law Firm in Kansas City, said there has been little guidance on how to resume collecting payments on student loans.
Now that payments are being resumed, McCormack said there needs to be a big shift in financing options if the goal is to keep people interested in attending college over other career options.
Divine, for example, said she wishes she had gone straight to trade school instead of college, because she might have had more manageable loans and could have ended up in a different financial position.
If people stop going to college because they can’t afford it without loans, it “would really throw colleges off,” McCormack said. But a solution like making loans dischargeable, or essentially canceled, in bankruptcy could help.
“The alternative is student loans became dischargeable in bankruptcy. That would be a major seismic shift of how they issue the loans, but I don’t see that happening right now,” he said.
Currently, student loan debt is on a short list of debt types exempted from being discharged, alongside categories like child support or criminal fines debts.
If a borrower decides not to make payments, they will be risking delinquency or default, which can hurt credit ratings and potentially make them ineligible for other kinds of aid.
How to prepare for the end of the student loan freeze
Until new options emerge, McCormack said people with loans should begin planning ahead now.
“I think people need to be proactive on it and start calling their servicers now and figure out what they’re going to do on it,” he said. “It’s going to be better serving for these people and for everybody if they start calling ahead now and say, ‘Okay, what am I looking at in September? Is there something I can do? Are there options available?”
Edgeller said the situation has been a topic of conversation among some of her friends, many of whom have gotten full-time jobs or internships this summer as they begin to think about how to pay off student loans.
She said she thinks this discussion is good, because “it’s a lot of talk that I again wish that I heard earlier on just because, you know, when you aren’t thinking about it at the time, it’s hard to realize what you’re getting yourself into.”
Treating student loan borrowers with compassion also is important, Divine said, and that it’s necessary to remember that many people were misled when borrowing and taking out loans with the intention of paying them back.
“When people say negative things, I think they just don’t understand,” she said. “My parents sent me and pushed me to go to college because we lived in poverty and they wanted me to have a better future, and that’s the way they thought that would help.”
Teagan King is a University of Missouri journalism student and summer reporting intern at Kansas City PBS and Missouri Business Alert, a fellow member of the KC Media Collective. Julie Freijat, a masters student at the University of Missouri and a Dow Jones reporting intern at Kansas City PBS, provided visualization assistance.
This story was originally published by Flatland and Missouri Business Alert, fellow members of the Kansas City Media Collective.
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