Is Biden admin right pausing student loan payments until August 31?
- On April 6, 2022, President Biden announced another pause on federal student loan repayments until the end of August to “assist borrowers in achieving greater financial security.”
- On December 22, 2021, President Biden prolonged the student loan payment grace period an additional 90 days through May 1, 2022, from the previous January 31, 2022 deadline.
- Former President Trump first granted student loan relief in March 2020 during the first spikes of the pandemic, then extending it to October, and again in December. Before leaving office, he extended deferment until January 31, 2021.
- According to Forbes, there are 43 million Americans who owe a combined total of $1.6 trillion in student loan debt as of April 2022. Younger borrowers between the ages of 25 and 34 hold the majority of debt, about $500 billion in federal student loans.
The Biden administration has cited economic downturn and loss of income as the reasons behind another prolonged suspension of student loan repayment. Unfortunately, their reasoning is faulty. The US economy is no longer in a state of disrepair, and the pieces of the economic catastrophe caused by the pandemic have been picked up. The US GDP returned to pre-pandemic levels in Q2 of 2021, and GDP per capita (one of the strongest indicators of standard of living) reached pre-pandemic levels.
In addition to GDP, post-pandemic income levels have exceeded their pre-pandemic numbers. The US economy is operating at 95% of where it was in early March of 2020, and the unemployment rate is currently 3.6% compared to 3.5% in February of 2020
The Biden administration has expressed its desire for student-loan forgiveness to be championed by the legislature, so this pause is another way to get there. Still, student-loan forgiveness would lead to massive misallocation of capital in the loanable funds market. By allowing students to take out loans without collateral and regardless of their ability to pay (return on investment), these loanable funds will continue to go to those who cannot afford them, and thus should not receive them. This is why America has $1.61T in student loan debt with 20% of student loans are currently in deferment.
The US economy is getting back to normal because Americans are getting back to normal. There is no longer an economic need to continue the suspension of student loan payments as student loan forgiveness would hurt the economy long term.
The Biden administration's decision to extend the pause on federal student loan payments until August 31 will bring relief to many former students. The key reasons behind this move are due to rising inflation and continual issues occurring with the supply chain; both have made most household items very expensive. Only the Direct and Plus loans available to graduate students and parents on behalf of their children are eligible for this benefit of extended loan deferment. Federal Family Education Loans don't qualify.
Even though the economy is stronger than it was 12 months ago, the nation is still in the recovery phase from the COVID pandemic. But the economy still appears fragile and labile with the ongoing war between Ukraine and Russia. This extra six-month extension combined with the loan payment freeze from March 2020 will help borrowers achieve better financial security and stability. Remember, for the past two years, the government had stopped the interest from adding up, and all collections of defaulted loans were put on hold—so the borrowers should presumably be in a much better place financially speaking to pay off their loans by August. This is perhaps the final extension as COVID cases are declining, and the economy is slowly gaining strength.
The borrowers who will benefit from the loan pause are those working in the public sector, as they may also be eligible for loan forgiveness after a decade. The payment pause and zero-interest will result in debt relief equivalent to nearly $5,500 per borrower. And people who borrowed bigger sums of money, like lawyers and doctors, will benefit the most from the halt on interest payments. The next right step would be to cancel some or all student loans.