My former colleague, Dr. Mark McComb, a retired business Mississippi College professor, has been warning for years about the looming crisis in student debt. I listened to his statistics and understood the problem, but I expected the unraveling to be slow and quiet. The current administration’s approach to the problem threatens to make this a fiscal cliff for individuals that will bleed over into the entire economy.
Currently, more than 42 million people have student debt. That represents about 13% of the entire US population. The total debt outstanding is approximately $1.8 trillion.
How did we get here?
In 1965, we passed the Higher Education Act that set up a system of borrowing that encouraged debt for education purposes. As it began, private lenders gave out loans to any and all, knowing that the Federal Government would “make good” on bad loans. Such an arrangement allowed lenders to ignore risk in their lending practices.
At the time, the US was in a race with the Soviet Union and wanted to promote higher education for us to compete globally. It worked. More people went to college because they could take out loans to cover the cost. Inadvertently, it may have led to higher tuition as public and private institutions took advantage of the availability of this money.
In the 90s, income-based repayment plans were introduced, limiting payments to about 10% of income. In 2007, we passed the Public Service Loan Forgiveness Program. This set up a forgiveness plan for anyone who worked in a public service role for 10 years while continuing to make payments on loans. Later, this was expanded to non-profits. This set the stage for some type of forgiveness for these loans. All these programs recognized the problems in the student loan market and attempted to offer a band aid of relief to borrowers. Discharge of student debt in bankruptcy is extremely rare.
In 2010, the US Government took over much of the role of the private lenders. This was tucked into the Affordable Care Act which sought new sources of revenue. The thinking was that the government was on the hook in case of default. Why not make the interest on these loans that were going to private lenders?
How did we get to the “fiscal cliff?”
In 2020 when COVID hit, a moratorium on student debt payments was instituted. Offering payment relief during work shutdowns was a way to ease economic damage. President Trump extended the moratorium multiple times. President Biden extended it several times, as well. After four years, Biden set a timeline of 12 months for payments to restart. During this time, servicers did not report delinquencies to credit agencies, though, so many did not restart payments. That means that many borrowers have not made payments for nearly 5 years.
In the meantime, President Biden tried addressing the problem by offering loan forgiveness for up to $20,000. This was struck down by the Supreme Court. Biden also instituted a new income repayment program called SAVE that would limit payments to 5% of income. The intention was to ease the stress of restarting payments after the moratorium. Eight million borrowers signed up for SAVE. This program has been challenged, and the current Department of Education has taken down information about ALL income-based programs. In effect, the SAVE program is no more.
And where do we stand now?
About 5 million borrowers are in default. Another 4 million have delayed payments and may also go into default. Servicers are reporting these 9 million people to credit agencies. Credit scores are being hit hard, affecting the ability of these borrowers to get additional loans, open credit card accounts, rent apartments, and maybe even affect employment.
Servicers are overwhelmed as payments are restarting. Borrowers are struggling to get help from a hollowed-out Department of Education. One million new applications for income-based plans are being held up due to loss of staffing. Payment calculations are varying widely, and borrowers are in a state of panic.
The Trump Administration has announced that “involuntary” payments will begin May 5th. Tax refunds, pensions, Social Security benefits, and even wages may be garnished to cover debt payments.
So, you don’t have a student loan? Why do you care?
While this is a serious problem for anyone facing student debt with limited ability to make the payments, it’s also a problem for the economy at large. Consumer spending has already slowed. Family budgets will be hit hard with the loss of discretionary income. That will be less to spend on other things. And those whose credit is affected will find their ability to buy cars, houses, and other items on credit reduced.
So, Dr. McComb, I am really paying attention now. The student loan market has been a mess for a while. Currently, this fiscal cliff threatens us all.
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