As we approach the end of the federal student loan payment suspension on August 30th, I feel a deep concern for the millions of student loan borrowers who will soon face financial challenges. It is crucial to address this issue with compassion, setting aside personal opinions about student loan debt and the upcoming forgiveness debate in the Supreme Court. We must acknowledge that many students and parents have over-borrowed, and they now find themselves in a precarious situation.
During my time at Prudential, I extensively researched and wrote about student loan debt, which affects not only students but also a significant number of parents who felt compelled to support their children’s education financially. For example, according to the U.S. Department of Education’s College Scorecard, the median amount of debt parents of Spelman College carry when their child graduates is $105,566, with 40%-50% of parents borrowing. The Parent Plus loan program enables parents to borrow the full cost of tuition, minus any financial aid received on behalf of the student, resulting in average monthly repayments of $1,255 for these parents.
These substantial monthly payments of student and parent borrowers have been suspended for three and a half years. Meanwhile, research suggests that those who benefited from loan forbearance increased their auto and credit card debt during this period. New mortgages also rose among individuals with loans in forbearance. Moreover, credit scores improved as borrowers were not required to make student loan payments and interest did not accrue, leading to greater access to credit.
From a behavioral finance perspective, this situation has allowed borrowers to experience an increased monthly cash flow. Naturally, they may have been more inclined to make large purchases or take on additional debt during this period. Over the past three and a half years, borrowers may have become accustomed to their new financial circumstances.
However, this temporary relief is about to end, and many borrowers will now face increased consumer debt on top of their student loans. With inflation, the cost of living has also increased. Some (Much?) of this inflation can be attributed to the payment suspension, as $185 billion not paid to the government instead boosted household cash flow among those with student loan debt.
The consequences of this impending shift are concerning. We may see parents working far longer than they initially planned, while younger adults with student loan debt could reduce their contributions to retirement savings and the 529 plans of their own children. Credit card debt is likely to surge, and mental health issues that worsened during the pandemic may further intensify due to the stress of “post-forbearance financial distress.” As this financial strain breaks like a tidal wave, tensions will inevitably rise on social media and in the lead-up to the 2024 presidential election. Additionally, with many economists already predicting a recession within the next twelve months, the end of the payment suspension may serve as a catalyst for an economic downturn.
Decoding the Successful Retirement Journey: Vol.2, No.6
