The pandemic payment pause for federally-backed student loans is set to expire after May 1, and both prominent Democrats and advocates for reform are warning that many borrowers are not prepared.
“Our own surveys show that 90% of student loan borrowers are not ready to resume payments,” Student Debt Crisis Center Executive Director Cody Hounanian told Yahoo Finance Live (video above).“No matter how you look at it, a large majority of people with student loan debt in America… still feel financially insecure."
Student loan payments and interest on federally-held debt have been suspended since March 2020, meaning that an estimated 37 million borrowers did not have to pay on their loans. Another roughly 10 million borrowers who hold private or Family Federal Education Loan (FFEL) loans owned by commercial banks did not benefit from the payment pause.
“The economic recovery really hasn't reached” middle-class working families, Hounanian said. “For these student loan borrowers, if payments resume… they're going to be facing a financial cliff that could be disastrous.”
White House Chief of Staff Ron Klain recently said that President Biden "is going to look at what we should do on student debt before the pause expires, or he’ll extend the pause."
'Recipe for a political disaster'
President Joe Biden backed the forgiveness of $10,000 in student loan debt on the campaign trail in 2020. During his administration, prominent Democrats have repeatedly urged a seemingly skeptical President Biden to enact broad-based cancellation of up to $50,000 via executive action (as opposed to legislation passed by Congress).
An erasure of $10,000 for all of those borrowers would cost roughly $371 billion and erase the total debt of roughly 36% of all borrowers with federally-backed loans.
If the payment pause ends in May, 7.8 million borrowers — roughly one in three student debtors — are at "high risk" of struggling to repay their loans, according to a recent analysis from the California Policy Lab and the Student Loan Law Initiative.
A recent study by the New York Fed looked at the 10 million borrowers who did not benefit from the payment pause and concluded that "difficulties faced by these borrowers in managing their student loans and other debts suggest that Direct borrowers [of federally-backed loans] will face rising delinquencies once forbearance ends and payments resume."
For these borrowers, many of whom were in delinquency prior to the pandemic, “the pause on student loan payments worked," Professor Dalié Jiménez, director of the Student Loan Law Initiative at UC Irvine Law, said in a press release.
A separate Student Loan Hero survey of 1,050 borrowers found that 72% of debtors with federal loans are not ready to resume monthly payments. More than half of respondents who benefited from the interest-free payment pause said that they had reallocated the savings towards expenses such as housing or groceries. Some had even used it to pay off other debt.
“If they do not extend the payment pause, I think that's a recipe for a political disaster,” Hounanian said, “because then you're going to have tens of millions of Americans who have their finances really undercut by poor policy decision.”
Many progressive voters who consider student loan cancellation a core issue “may change their voting habits,” he added. “They may not even vote because of student loan, cancellation policies.”
In any case, Hounanian echoed other voices in calling for clarity.
“As it stands now, borrowers do not know what's gonna happen in just 32 days. We need clarity,” he said. “We need an announcement related to extending the pause and we need this information as soon as possible so that families can really start to prepare without it. There's confusion, there's anxiety. There's a lot of frustration. And we just don't have answers right now.”
Aarthi is a reporter for Yahoo Finance. She can be reached at [email protected]. Follow her on Twitter @aarthiswami.
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