The Wrong Direction, 6

The other debt “bomb” ticking away in the United States is the student loan debt that will need to be addressed in the near future.?For purposes of this article, I have used Federal Reserve Bank data that defines student loan debt as federal student loans, which are backed by the United States government, private student loans, which are non-federal loans made by banks, and sources of parent borrowing such as Parent PLUS loans.?The total loans owed works out to an average owed per student of over $40,000 each.

As I am sure you are aware of, one of the largest COVID-19 relief programs in the United States was the student loan forbearance program that has according to published reports saved students about $15,000 on average since it started in March 2020. It is especially important to understand that contrary to what many want to believe, student loan payments were only put on hold since then, not forgiven. And it appears (subject to change) that this “honeymoon” of no payments is about to end no later than June 30, 2023.

The current Secretary of Education in the United States Miguel Cardona has announced that the current Federal Loan Deferment Program will end no later than June 30, 2023, and payments are expected to resume by Sept. 1, 2023. And if this happens, the potential financial impact to the American economy and consumers could be a real shock. Of the current $1.7 Trillion owed in student loans, about $1.1 Trillion has been in forbearance since 2020. This amount is about 65% of the total owed and it is important to keep this huge number in context; recall that the entire GDP of the United States is currently about $25 Trillion so the total represents about 5% of the total GDP of the United States.

I looked up some additional facts about this student loan pile in the United States due to the fact that I had no idea that the total amount owed was anywhere near the $1.7 Trillion current outstanding debt.

According to a Federal Reserve analysis of the Federal Direct Loan program, there are about six million students still in school that owe about $120 Billion. Another nearly two million are in a grace period and owe about $40 Billion. There are less than 500,000 borrowers currently making payment on only $41 Billion of debt. Three million students have deferred loans totaling over $110 Billion and twenty-four million students owe the $1.1 Trillion borrowed that are currently in forbearance. And unfortunately, another $100 Billion loans are in default owed by 5+ million borrowers.

I should note that Federal student loans make up the lions’ share of the huge education debt in the United States. Over 90% of the $1.7 Trillion owed is federal debt from over forty million students in the United States.

So, what are the concerns if the forbearance process ends as I have already pointed out in this article? Consider these additional facts about the Federal loans owed to the government by over forty million Americans:

1.??????A recent Federal Reserve Bank of New York study calculated that the average student loan payment owed to Uncle Sam is about $400 a month, or $4,716 a year.

2.?????Assuming that all of the eligible students elected to join the forbearance program back in March 2020 when started by then President Trump, this means that over $15,300 was deferred (not forgiven) and has been in most cases spent on daily expenses by many of these borrowers.

3.????This means that their incomes (or more accurately discretionary income) in this period have been artificially increased by about $5,000 a year.

So, if or when it comes time to make payments on these deferred not forgiven loans, will students have the financial resources to do so, or not? If they saved the nearly $15,000 mentioned above, then there ought to be no issue or problem. But in all of my reading and research, there is a unanimous agreement by economists and others that this windfall was spent and that the extra cash was incorrectly perceived as being a “permanent” part of the borrower’s cash flow budget.

If this is the case, I would then classify the forbearance program as a huge mistake by our Federal government. Why? When the program was originally conceived it was only ever intended to be a short-term boost to combat the turndown in the American economy due to the COVID-19 pandemic. But unfortunately, I suspect many spent the cash and now find themselves in a financial pickle.

There are conversations and corresponding lawsuits and litigation (both pro and con) that are seeking to either forgive all or some of this $1.7 Trillion amount owed by students in the works. Whether these occur or not is anyone’s guess and The Supreme Court is expected to rule on a myriad of issues related to the amount owed, whether the President of the United States even has the authority (or not) to forgive or cancel the debt and other aspects of the entire program. ?A lot of the reading I did on whether or not repayments will be required or not soon rests on what happens and when at The Supreme Court. I am not an expert or lawyer so the best I can do is to encourage all impacted or due to repay a student loan to carefully monitor all future developments on this matter.

But whether it is June 30, 2023; September 30, 2023, or even in 2024, the stark reality is that at some point in time, someone will have to start paying back and off the loans in the Federal Student Loan program in the United States. The longer the deferral period, the larger the potential disaster looms if borrowers are unable to make good on their financial obligations. And if or when they do, about $5,000 of income and cash flow will evaporate annually in the spending of each borrower who pays back their debt on a consistent basis.

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The next article that I ran across in my reading of the Wall Street Journal ought to be of particular concern to the factoring industry in the United States, and again a topic that I have written a great deal on over the past several years. The headline below is not really surprising given the pullback in spending by consumers and the fact that they are having an increasingly difficult time in even paying off the consumer and installment debts they already owe.?