Student-loan payments are resuming in 3 months — and borrowers might not be ready for the 'sizeable shock' to their wallets
- Student-loan payments are set to resume in October.
- Bank of America and Morgan Stanley highlighted the strain borrowers will face.
Student-loan payments are resuming this fall after an over-three-year pause — and borrowers aren't feeling too great about it.
Earlier this month, President Joe Biden's Education Department confirmed that payments are resuming in October, with interest beginning to accrue again on borrowers' balances in September. This comes after both former President Donald Trump and Biden extended the pandemic-era payment pause multiple times to give millions of federal borrowers financial relief.
But after Biden signed a bill to raise the debt ceiling into law at the beginning of June — which codified the end of the student-loan payment pause — the White House made clear another extension is not in the cards. Both Bank of America and Morgan Stanley highlighted in recent notes that resuming payments won't be easy for the majority of borrowers, with some at risk of falling behind.
"If payments were to resume in full, we think it is reasonable to assume that serious delinquencies would return to at least pre-Covid levels, since the share of seriously delinquent student loan balances was little changed between 2012 and 2019," Bank of America's Ethan Harris, head of global economics, wrote in a note last week.
"In dollar terms, such an increase would amount to $167 billion of new seriously delinquent balances, which would raise total serious delinquencies across all categories of household debt by around 67% relative to their 1Q 2023 level ($249 billion)," Harris wrote. "This would be a sizeable shock, and it would probably have knock-on effects to other categories of debt as well."
And a Monday note from Morgan Stanley researchers said that just 29% of federal student-loan borrowers are confident they'll be able to afford payments without adjusting spending in other areas. Additionally, 37% of borrowers surveyed said they'll need to cut back spending in other areas, and 34% said they won't be able to afford the payments at all.
Insider has previously reported on the likely negative economic impacts the student-loan payment resumption will bring. Marshall Steinbaum, senior fellow at the Jain Family Institute and economics professor at the University of Utah, told Insider that if the government starts trying to collect on loans borrowers are unable to repay, "it's just a more onerous way of operating a lending portfolio of trying to collect debt that fundamentally can't be collected and trying to squeeze the borrowers as much as possible in order to make that debt collectible. And that's very bad for the macroeconomy."
Still, Education Secretary Miguel Cardona has expressed confidence that the department can facilitate a smooth transition to repayment for borrowers. "We want to make sure that the information that borrowers get is accurate. We do plan on making sure it's a smooth reentry to repayment," Cardona said during a May Senate hearing, adding that "the emergency period is over, and we're preparing our borrowers to restart."
In the meantime, borrowers are waiting for the Supreme Court to decide the fate of Biden's plan to cancel up to $20,000 in student debt, which is expected to come this week. And in the event of an adverse ruling from the high court, some Democratic lawmakers want Biden to extend the pause so borrowers do not have to pay off their loans until they see a reduction to their balances.
"If the Supreme Court blocks student loan relief, @POTUS should be prepared to use his executive authority to cancel student debt and extend the pause on loan payments to fulfill our promise to loan borrowers," California Rep. Ro Khanna wrote on Twitter on Monday.