What the Debt Ceiling Deal Means for Student Loan Borrowers

By the end of August, some borrowers of 45 million loans will have the ability to resume payments, which means that the long three-year pause on federal student loan payments, finalized by President Joe Biden on Saturday, has come to an end with the bipartisan debt ceiling deal being signed.

Many borrowers have stated that the pandemic-era extensions and pauses, which have been of great assistance in getting out of debt and achieving financial recovery, have been pushed to the end by GOP lawmakers. The pause has been renewed nine times across both the Trump and Biden administrations, as many were uncertain about what would happen if it was lifted. The Biden administration has repeatedly announced that the final payment pause would end within two months by the end of June, although it was initially announced in November.

The Department of Education is specifically forbidden from enacting any prolongations on the suspension in the present bill for the maximum amount of debt. Kevin McCarthy, the Speaker of the House from the Republican Party, recently pointed out that the suspension has resulted in the federal government losing $5 billion in revenue each month.

According to Michael Dinerstein, an economics professor at the University of Chicago, “the prolongations are the main cause why the negotiation package for the debt ceiling made both parties agree that this will truly mark the end.” “Historically, the executive branch has frequently extended the suspension of payments on its own,” he explains.

What is described here could potentially occur. Borrowers will be able to resume loan payments at the end of August, which means that the 60-day pause on payments, as stated in the text of the law, will no longer be in effect after June 30.

Analyzing potential outcomes, economists have theorized that it could be challenging to pay off debt for many borrowers, as they have increased their loan amounts. However, it is largely uncertain how the renewal of student loan payments will affect people in a few short months.

The number of Americans taking out auto loans and mortgages has substantially risen this year, according to Dinerstein. However, people are still struggling to pay off their debts, as they are making late car payments at higher rates than today’s inflation rates, surpassing incomes throughout 2022 and early 2023.

Dinerstein suggests that the surge in credit card debt and delinquent payments may be attributed to individuals responding to the altered circumstances brought about by the pandemic.

Following the pandemic, Dinerstein notes that individuals whose income has increased may not be affected, especially considering their expectation of receiving partial or complete debt forgiveness through Biden’s initiative to eliminate up to $20,000 of debt per borrower. Certain borrowers express concerns regarding their ability to meet payment obligations.

Some critics have also voiced concerns about the outdated payment systems that lenders previously used to collect loan payments, as borrowers worry about how much and when to start repaying their loans when the long pause imposed by the federal government, which has also significantly reduced funding for loan servicers, ends. This pause has caused growing worries among borrowers, as they face confusion over how and when to pay back their loans, with an estimated 40 million borrowers expected to begin repaying.

According to Dinerstein, “there are actually a few servicers who are no longer in business and they receive the loans and administer the payments.” People may need a few months to figure out how to pay and there are general worries about disruption.

What if you can’t make your loan payments?

A popular choice for borrowers who may not be able to make monthly payments is signing up for an income-driven payment plan, where the monthly payment is dependent on the borrower’s adjusted income and can fluctuate.

Some individuals facing financial difficulties may have the choice of loan forgiveness, deferment, or forbearance. Prolonging the repayment duration might assist borrowers by merging their loans.

Learn More: When Should You Consider Refinancing Student Loans?

Greater impacts

Proponents of debt relief have advocated for the continuation of the pause on loan cancellations until President Biden delivers on his promise. The plan, which has been blocked since last year, is facing constitutional challenges and will potentially be dictated by the looming ruling of the Supreme Court. While the plan is expected to face hurdles with a conservative majority on the court, a decision is set to be made this month.

Dinerstein highlights that this could aid in decreasing price inflation. Conversely, there is a possibility that numerous American citizens might experience a decrease in expendable earnings once their loan repayments recommence, potentially resulting in a ripple effect on the economy and restricting non-essential purchases. The impact of ending the payment suspension on individuals who do not borrow and the overall United States economy remains uncertain.