For the past few months, people across the country have had extra money in their bank accounts because of a forbearance period on federal student loan debt.
That period has helped people spread their money further during the uncertain economy created by the coronavirus pandemic.
But come Sept. 30, payments will be reinstated and the economy will see a significant impact.
“Reinstating these repayments in the middle of a recession will exacerbate the financial issues for many families,” said Dominique Johnson, a research associate at Old Dominion University’s Dragas Center for Economic Analysis and Policy. “So obviously, student loans were a big issue before the pandemic but they’re an even bigger issue now.”
The federal government passed the CARES Act in March which allowed for a number of economic relief benefits during the pandemic, including for federal student loan borrowers. The Act automatically placed federal student loan borrowers on administrative forbearance, which allowed them to temporarily stop making a monthly student loan payment until Sept. 30.
But as the end of that period draws near, families and students might still be financially insecure because of the pandemic.
“When this six months of forbearance period was first put into place, obviously the expectation was that the economy would be in a better place,” Johnson said. “But obviously that’s not the case.”
Johnson said the region is still seeing a high unemployment rate at 10 percent as of June and because coronavirus cases are increasing and restrictions are tightening, the local economy will continue to suffer.
More than 40 million Americans before the pandemic had student loan debt averaging at about $30,000 per person, according to the Institute for College Access and Success.
Those student loan borrowers felt some relief as the economy suffered during the pandemic. But the fact that student debt can create such an economic impact has been highlighted by the pandemic, Johnson said.
“It’s highlighting a real issue in our country that this pandemic has further shined a light on,” she said. “The pandemic highlights the issue of student loans and the burden it places on young people starting new jobs…and the need to address this because we’re seeing how in times of a recession, it only exacerbates the problem.”
Bob Aston, board chairman of TowneBank, said the student loan debt could create an impact for graduates looking to borrow money for larger purchases such as a home. Towne Bank doesn’t typically deal with student loan debt, but it does look at an individual’s credit score which can be impacted by late payments on student loans.
“It definitely could have an impact,” he said. “But it will depend on a large degree of what income they have when they get out of school. It’s not unusual for…student debt to have a negative impact on their ability to borrow money and the driving factor will be what percentage of income can they afford to pay to that debt.”
Johnson said the issue also becomes more significant as the moratorium on evictions and the extra unemployment benefits end.
While some solutions are being discussed, Johnson said there isn’t a clear decision on whether or not the forbearance period will be extended.
The federal government is currently discussing plans for potential continued economic relief. Senate Republicans this week released a $1 trillion coronavirus relief bill, referred to as the Health, Economic Assistance, Liability Protection and Schools (HEALS) Act, that doesn’t include continuing the forbearance period for student loan debt.
In response, the National Consumer Law Center, a nonprofit organization that works for consumer justice, released a statement that the proposed act will fail the millions of student loan borrowers counting on Congress.
Johnson said the forbearance period eventually comes down to a back-and-forth political discussion that will decide the financial stability of student loan borrowers.
While nothing has been determined yet, Johnson said she believes there are more benefits to continuing the forbearance period than ending it.
“I think it should be continued in terms of the impact,” she said. “If it were continued, it would help this pandemic recovery move along and help [borrowers] when they have no options to return to a job in a pandemic, and letting these expire would have the opposite effect.”
Johnson said the negative impacts are very few for individual finances. Depending on the relief provided, the federal government would also have to consider where to limit or move its spending.
In terms of personal finances and helping economic growth, Johnson said the forbearance period is a significant tool to help stabilize the economy.
“If the forbearance period ends, you’ll see that reverberate throughout the entire economy in terms of more struggles,” she said. “People will see a huge strain financially which means less spending in the economy and will create a multiplier effect…so we will become stuck in terms of financial relief when it’s tough to get back to work because of restrictions in the pandemic.”
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