(NerdWallet) – After nearly two and a half years of pandemic relief, federal student loan payments will restart after the pause expires Aug. 31 — unless it’s extended for the seventh time.
There is talk that President Joe Biden will announce some student debt cancellation sometime this summer — but there is no guarantee.
And now with inflation hitting its highest rates in decades, student loan borrowers have an additional uncertainty to navigate: With prices higher for food, gas and so much more since the last time they made a student loan payment, what will adding those monthly payments back into the mix do to their finances?
Economists like Kathryn Anne Edwards at the Rand Corp., a nonprofit global public policy think tank, say borrowers will likely feel the impact of inflation when payments restart, but it will hinge on an individual’s circumstances.
“It depends on if the student loan payments are going to pull from their current income or if the payments are going to pull from their current income plus savings,” Edwards says. “If they’ve done targeted savings around student loans restarting, they have some extra cushion.”
Multiple financial forecasts expect inflation to peak this summer, but remain elevated through the rest of the year. Here’s how both the payment restart and student debt cancellation could impact your spending power.
What inflation means for the student loan payment restart
Since income, savings and debt are unequal across the board, even if it weren’t a period of high inflation, some would have more difficulty fitting student loans back into their budgets.
“People have a different amount of wiggle room when prices go up,” Edwards says.
“Some people might have been saving up for it and other people are going to be completely backed into a financial corner,” she says.
Robert Kelchen, professor and head of the Department of Educational Leadership and Policy Studies at the University of Tennessee, says restarting student loan payments is going to get messy no matter what.
“Borrowers haven’t paid in nearly two and a half years, student loan servicers got burned the last time they thought payments were going to resume, and there will be a lot of frustration among borrowers,” Kelchen says.
If you’re concerned about being able to repay your debt, here’s what you can do:
- Reassess your monthly budget: See if you have expenses you can cut down on to fit your student loan back into your monthly spending. If you follow the 50/30/20 budget, that would mean 50% of your spending goes to “needs” — like your minimum student loan payment and housing costs — 30% goes to wants and 20% for savings and debt repayment.
- Consider income-driven repayment: Your servicer can tell you about other repayment options like income-driven repayment, which would cap payments at a portion of your income and extend your repayment term. It could end up lowering your payment, but you’ll end up paying more interest over time.
- Take an additional pause: Another payment pause like a hardship forbearance or unemployment deferment should be a last resort. That’s because while your payments are paused, interest continues to accrue and is tacked onto your principal balance when you do start repaying.
How significantly could student loan cancellation help borrowers?
Recent White House leaks to the press suggest that $10,000 is the likely amount borrowers can expect if cancellation happens. Eligibility could also be tied to income, which would potentially result in an application process.
Cancellation of $10,000 per person has the potential to wipe away debt for 15.2 million borrowers — if they all qualified. If it happens before payments restart, those eligible borrowers would be student-debt-free.
For 30.5 million other borrowers, $10,000 in cancellation could put those eligible closer to fully repaying their debt, barring any interest that grows faster than they can repay. But it may not make it any easier to meet their monthly payment obligations unless the Education Department opts to recalculate monthly payment amounts using the new balance after cancellation goes into effect. It’s unclear if that would happen.
One thing that’s critical to understand about cancellation, experts say, is you’re not being handed money.
“The amount of money people get up front is very small,” Kelchen says. “Even if you have $10,000 in debt and it all gets forgiven, it means you’re not making payments for the next several years, it’s not like you’re getting a $10,000 check.”
Could cancellation or restarting payments make inflation worse?
The Biden administration’s message is that coupling cancellation with restarting student loan payments would offset any broader impact on inflation that cancellation could have, according to a May press briefing by White House National Economic Council Director Brian Deese.
Logically, if you restart student loan payments, borrowers will have less money to spend on other things. Edwards says that would reduce demand and could, therefore, be anti-inflationary.
And the fears about cancellation worsening inflation are likely overstated, according to Alí R. Bustamante, deputy director of the Worker Power and Economic Security program at Roosevelt Institute, a liberal think tank. He says cancellation would likely have little impact on inflation — and subsequently the prices you’re paying for goods and services.
It all comes down to why inflation is high in the first place: it’s due to snarled supply chains, not because consumers have more money to spend, Bustamante says. Again, cancellation doesn’t put more money in people’s pockets, rather it removes the constraint of debt.
Cancellation would make a big difference to individuals’ long term financial prospects. But on a broader scale, even full cancellation — all $1.7 trillion of it — wouldn’t do much to inflation, Bustamante says.
“It would be insignificant in the short and the long term, given the broader scale of it,” he says. Canceling all $1.7 trillion debt would have an impact on the 43 million borrowers with debt, but their families and dependents would feel the effects, as well, Bustamante points out. “If you’re measuring impact, $1.7 trillion distribution is minute,” he adds. “I think it underscores just how large the American economy is.”
Still, there isn’t a clear consensus as to how cancellation would impact inflation. Others insist it would add to inflation, such as the Committee for a Responsible Federal Budget, a right-center public policy organization,
“There are people who don’t like student loan cancellation as a policy who will say it will make it worse and there are people who love the student loan cancellation policy and they’ll say student loan cancellation will make it better,” Edwards says. “They’re using the … hot issue of the day economically to make their point.”
In fact, the lack of detail around cancellation and the restart of payments has given everyone with a stake in the issue room to make their point — except borrowers, who can only wait and see.