Student Loan Debt Update

As I recently wrote and published about in a comprehensive article, the student loan debt cliff is looming ever closer, and it seems as if no one wants to even talk about it or discuss the implications of this coming financial tsunami openly and objectively in the United States.

I read early this morning an update on the issue and about the only thing I can say with confidence is that wishing the problem will just disappear or go away (like we have seemingly resigned ourselves to do with our Federal Deficit that now stands at $31.916 Trillion as of today, June 16, 2023) is not a viable solution. My research into the current size of the total student loan debt in the United States as of today is a stunning number: $1,807,180,867,031 or to make it simpler to understand, $1.8 Trillion.

As an aside, this number is determined and defined by the Federal Reserve as “all Federal student loans, which are backed by the government, private student loans, with are non-federal loans made by banks, and sources of parent borrowing, such as Parent PLUS loans.”

This quick update on the student loan debt cliff can be summarized in a couple of words: nothing has changed materially other than we are inching closer to the date later this fall when student loan borrowers must start to begin making payments on the $1.8 Trillion debt owed on these obligations.

Almost on cue, there are predictions of doom and gloom regarding the end of the deferment (not forgiveness) of these loans. And a look at the facts leads me to believe that some if not all of these concerns are valid. Consider that:

1. Nearly thirty million borrowers could have to pay approximately $200–$400 monthly once the pause ends, according to a report published by BOA.
2. The CFPB or Consumer Financial Protection Bureau just published data (as noted in Axios) that about 8% of student loan debtors are behind on some other consumer loan payment obligations already.
3. The same source said 20% of student loan debtors have “risk factors” that may cause them financial duress when it comes to repaying back their student loan obligations.

?So, when payments are expected to be required to restart in October 2023, it is anyone’s guess what will happen. But a quote I read online at Axios summed it up best for me:

“I think there’s gonna be a lot of people who are confused and upset and there’s gonna be a lot of bounced checks.” – Adam Looney, nonresident Senior Fellow at Brookings and Executive Director of the Marriner S. Eccles Institute at the University of Utah.

Absent some change in the current sentiment for forgiveness (shot down in Congress and now in front of the Supreme Court), it seems almost inevitable that the American taxpayers might end up holding the empty paper bag and wind-up footing some if not all of these debts. Whether this happens or not remains to be seen.

But I think the more important conversation we should be having is this: will the student loan repayments (that have been on “pause” since March 2020) that average $400+/- a month cause cash strapped Americans to not make other payments they owe like credit cards, or not? The BOA research previously mentioned wrote that “the resumption of a monthly obligation that has been suspended for three plus years could pressure consumer finances and weaken credit performance on other loans." This note was again originally published online at Axios.

If so, the implications on the banking industry in the United States are pretty clear and this could cause a domino effect on loans of all other types including consumer installment, automobile and other loans. It will be interesting to watch and see what happens later this fall and it is sure to be a Donny brook in many ways for the strapped American consumer in the near future.?