So … whaddya wanna know about student loan repayments?

Make Me Smart July 27, 2023 Transcript

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Kimberly Adams 

Okay, now we can go.

Kai Ryssdal 

Alright, here we go.

Kimberly Adams 

Hello, I’m Kimberly Adams. Welcome back to Make Me Smart where we make today make sense.

Kai Ryssdal

I’m Carl Rosedale. Thanks for joining us, everybody on this Thursday on this one’s the 27th of July. And here is what we are going to do today. Student federal student loan payments are set to resume in October, we’ve been getting questions because we asked you for questions about what that might mean for the economy, you know they didn’t just come. Although maybe some of them did. I don’t know. So we’re gonna answer some today. That’s what we’re gonna do.

Kimberly Adams

Indeed, we are calling this whaddya wanna know about student loan repayments? Because why not give it a name? We love the branding. Anyhow, let’s get to our first question.

Kristen

Hi, this is Kristen calling from Philadelphia, and I’m wondering what’s going to happen to the economy when all the money that student loan borrowers have been able to not pay and have been pumping into their vacations and dining out and buying furniture and things have to start going back to paying student loans this fall. Can you make me smart? Thanks.

Kai Ryssdal

Good question. Who’s taking this one? You want to take that?

Kimberly Adams

Why don’t you go ahead.

Kai Ryssdal

Okay, so, so something is going to happen. We don’t quite know yet what, but something is going to happen. So there’s a study out from TransUnion. They had some research not too long ago, that pointed out that about 27 million borrowers whose loans have been in what’s called forbearance are going to have to resume payments this fall. 20% of those repayments are going to be over $500 a month, more than half of them are going to be over $200 a month. And I don’t care what you’re, well, I mean, obviously, if you’ve got a ridiculous budget, that’s not a lot of money. But for most normal people in this economy, that is a chunk of money. And so the money that they’ve been able to spend on Beyonce and Taylor and going to Barbie and you name it is going to tighten up right, they are going to lose some discretionary spending and when that discretionary spending changes, right, it impacts retailers. Kristin Schwab did a story for us. She’s done a couple of stories, I think UBS research indicated the student loan borrowers are most likely to defer spending on apparel. So if you’re Gap or anybody in that industry, look out. Wells Fargo had a slightly contrary view, didn’t think it was going to be widespread enough to have a major impact on household spending. I would beg to differ as well, with Wells Fargo, I think you’d get 27 million people who were losing between $200 and $500 a month in discretionary income, that is a chunk of money. So yeah, it’s definitely gonna have an impact.

Kimberly Adams

And I imagine we’re gonna see the impact even before October, I mean, which is like now because people know it’s coming, and are probably going to start pulling back on spending early, and might even over-pull back. However you might say that, because the correction.

Kai Ryssdal

Yeah, no, totally. And look, one more thing, and this is going to make me sound like a jerk. But in a way, this really helps the Fed, right, because there will be now fewer dollars out there chasing goods. And that is a positive thing for a central bank, which is trying to get inflation down another full percentage point. So trade-offs you know, trade off.. All right. Next question. Here is what Claudia wants to know: with the Supreme Court striking down President Biden student loan forgiveness program, what flexibility does the President have to give relief to people with student loans going forward?

Kimberly Adams

Who probably wishes he had a whole lot more flexibility because he’s been getting it from the progressives who feel like he needs to do everything possible to keep his campaign promises about student loan forgiveness. But anyway, he does have some other tools at his disposal outside of what the Supreme Court struck down. So the administration unveiled a new program that Marketplace’s Janet Nguyen has written up, and we’ll have a link on the website. But it’s basically going to allow about 800,000 borrowers to have their federal student loans forgiven to the tune of about $39 billion. But it’s only for borrowers who have made a certain number of payments, something like 240 to 300 monthly payments, depending on what their situation is. It was a type of relief that was available previously, but the loan servicers weren’t doing a great job keeping track of qualifying payments. So if you need to have 240 or 300 payments, you need to have some sort of record that those payments are qualifying you for this program. So the Biden administration made it easier to track those payments, which means a lot more people are going to be eligible. And therefore, it’s effectively a type of student loan forgiveness. There was also a different program that the administration unveiled before known as the SAVE plan, Saving on a Valuable Education plan, which is, Washington loves these acronyms to do a thing. The hoops they jump through sometimes to make things work, it’s entertaining. Anyway, I bet you could ask ChatGPT to start coming up with those.

Kai Ryssdal

Oh, I bet you could actually, for sure. And it would be better probably.

Kimberly Adams

Yeah. Anyway. All right so that was an income driven repayment plan that has been around for years in a different capacity. But now the payments are going to be something like 5% of a borrower’s discretionary income, as opposed to previously where it was 10, 15 20% of a borrower’s discretionary income. And how can the President do this given that the Supreme Court said you can’t do student loan forgiveness? These things that I just mentioned, these plans are sort of tweaks to existing programs, as opposed to a wholesale were going to forgive your student loan, which was done under the HEROES Act during the pandemic and was sort of a stretch according to the Republicans and the Supreme Court of that pandemic-era authority. And so given that these other programs are sort of like fixes and different administrative things, a lot of folks think that these are going to make it through okay.

Kai Ryssdal

I also think, that as the election, comes back around, progressives are going to start leaning on Biden to figure out another way to do this. It will be it will be, you know, not the issue in the campaign, not as high profile as it was last time, because it’s already been litigated and politicized and all that jazz, but it’s coming around again, for sure. For sure.

Kimberly Adams

Yeah, but if Trump ends up being the GOP nominee, all this stuff is going to be like, there will be less of an incentive for Biden and any of the Democrats to sort of do anything that the further-to-the-left-of-the party wants, because they know that those folks are going to vote against Trump. So.

Kai Ryssdal

Good point. Good point.

Kimberly Adams

All right. Next question. Liz wrote in to ask: did not having to pay student loan debt encourage people to pay down their other existing debt? Or sorry, other existing debt more aggressively? Or did people mostly take on additional debt because they had more room in their budget?

Kai Ryssdal

Yes, and no, and maybe and kind of. So there’s some evidence that finances did improve for some borrowers during the payment pause. For example, one study by California Policy Lab there at Berkeley, found that borrowers did reduce other debts, 44% of pause-affected borrowers paid down their debts on credit cards, 6% of them voluntarily increased their payments on other loans, car loans, mortgages, right. And and this is key actually, credit scores improved average credit score among affected borrowers went up from 640 to 668. Credit scores, of course, can factor in what kind of job you get, how much money costs for you right, what kind of loans you can get. So that’s actually a very big deal. But, you know, there’s some studies that show that borrowers took on other debts like credit cards, mortgages, auto loans study from TransUnion, which we mentioned a minute ago, said 53% of consumers with student loans open a new credit card, 36% of them took out an auto loan. So what does that mean? Well, look at as we talked about before, if consumers are losing anywhere from 200 to $500 a month in discretionary income, some things they’re not going to pay might include those new credit card debts and maybe auto loans right. So with as always, with this economy with the good comes from bad have, you know.

Kimberly Adams

Yeah, and expect to hear those TransUnion numbers quite a bit. Because I’ve already seen a couple of Op-eds talking about like, stop the whining and moaning about student loan repayments because people just squandered the money anyway and went deeper into debt. And this is another one of those things where there’s data showing both of the things. And you’re going to selectively hear certain data from some people and other data from others. So watch out. Absolutely. All right, last one today for today. Here you go.

Renee

Hi my name’s Renee, from North Carolina. I’ve heard that Biden back in the ’80s is the reason why student loans cannot be put into bankruptcy. So with all of the situations with his student loan forgiveness in the courts and it being struck down, is it still possible that he could kind of right the wrong from the ’80s and allow student loans to be put into bankruptcy?

Kimberly Adams 

This is the problem with being a long-serving politician in Washington, you have a record of everything. But some clarification to that idea of it is possible actually for borrowers to discharge their student loans through bankruptcy. It’s just really, really, really, really hard to the point that most people don’t even bother trying to do it. So unlike medical or credit card debt, student loan debt doesn’t automatically get wiped out when someone files for bankruptcy, borrowers have to file a separate lawsuit. And less than point 1% of student loan borrowers who file for bankruptcy, even try to discharge their student loan debt, just because it’s so hard. So yeah, that’s that’s one thing. The other thing is in terms of Biden’s role and all of this, back in the ‘70s, Congress made a change to the Higher Education Act that made it so that a borrower has to meet a standard of undue hardship. That’s the language to discharge their federal student loans through bankruptcy. At the time, Biden was a senator, and he voted for that change. So in his capacity as a senator, yes, he played a part in making that happen. But it wasn’t like it was his sole decision. But just as Biden did that, as a senator to make it happen, it would take Congress to make it not happen anymore. And in the past couple years, there has been a lot of discussion about reforming this process on Capitol Hill. Last year, the Justice Department which is the executive, not the legislative did issued new guidelines to make it less burdensome for borrowers to try to clear their debt through bankruptcy by saying that that that the borrower situation would have to be evaluated based on an attestation form from the borrower to make it less likely that the government was going to oppose the reliefs that undue hardship that you still have to prove because you do still have to meet the undue hardship standard. But it makes it seemingly a little bit easier to convince the powers that be that it’s a hard time for you. But it’s still not an easy process, and it would take Congress to change it, just like it took Congress to do it.

Kai Ryssdal

Yes, everything Kimberly said. Totally agree. Yes, totally agree.

Kimberly Adams

All right. I hope we answered your questions to your satisfaction. That is it for us today. We are going to be back tomorrow with cocktails and mocktails in hand and beer for Kai for Economics on Tap. You can join us on the YouTube livestream. I shouldn’t have said it like that. That wasn’t nice, your your beer is wonderful.

Kai Ryssdal

It’s all good. I appreciate it, I appreciate it.

Kimberly Adams

All right, the YouTube livestream starts at 3:30 Pacific 6:30 Eastern, don’t forget to sign up for our newsletter if you want to know what we’re reading and also maybe what we’re drinking a little bit ahead of time if you want to try to make cocktails along with me or join Kai and his beer. You can sign up for that at marketplace.org/newsletters.

Kai Ryssdal

Make Me Smart is produced by Courtney Bergsieker. Today’s episode was engineered by Charlton Thorp. Ellen Rolfes writes our newsletter. Our intern is Niloufar Shahbandi.

Kimberly Adams

Marissa Cabrera is our senior producer. Bridget Bodnar is the director of podcasts. And Francesca Levy is the executive director of Digital. One day I’m going to show up to the podcast with a beer and you’re going to be shocked.

Kai Ryssdal

I will not know what to do if you show up with beer. Will not know what to do.