The Financial Nightmare Creeping Up on Student Loan Borrowers
5 frightening ways borrowers will get screwed in October.
The coming months are going to be a horror show for the country, and student loan borrowers have some particular concerns to face this fall.
With a record $1.53 trillion in outstanding student loan debt and a delinquency rate of just under 11%, student loan borrowers are absolutely drowning in red ink.
Let’s take a look at how the next few months are going to make their situation even worse.
1. Extra unemployment money is ending (sooner than planned)
To help combat the macroeconomic shock of millions of American consumers having nothing but unemployment benefits to rely on, thus destroying the heart of our economy (which is 70% consumer spending), the government has been supplying up to $600 per week of enhanced unemployment benefits.
That extra money will soon end. And sooner than most people think. From CBS News,
The reason comes down to a technicality: the schedule for paying out unemployment benefits. The Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, set July 31 — a Friday — as the final day for paying the additional $600 in weekly pandemic-relief benefits. But some states pay out their unemployment benefits on weeks that end on Saturdays or Sundays.
Sure, a majority of the unemployed are making more while being out of a job than when they were working, but that is going away. What then? I can tell you that even with the high savings rate we currently have, it will do nothing in the fall if you don’t have a job.
2. Rent moratoriums are ending
While there is a federal mandate for mortgage relief, there is absolutely zilch available for renters on a national level. Like with almost everything else in this pandemic, what’s left is a patchwork of state and local moratoriums for renters.
Figuring out these individual regulations can be like reading War and Peace. In Russian. While blindfolded.
How will this disproportionately affect student loan borrowers?
Two reasons.
- Borrowers who have the highest balances skew younger. From Experian, “Borrowers ages 25 to 34 have the most student loan debt.”
- Younger people are mostly renters, with 49% of people under 30 renting.
On top of all this, most of the moratoriums around the country are ending. Take a look at this prediction from a recent CNN article, “US faces ‘avalanche of evictions’ as rent protections expire”.
By the end of September, up to 23 million Americans will be at risk of eviction, according to a report by the Covid-19 Eviction Defense Project and the Aspen Institute Financial Security Program.
I’m usually a huge advocate for renting, but this time homeowners may have the upper hand for not losing their primary residence.
3. Debt in the form of credit cards is drying up
When people stop having cash to pay their bills, they inevitably turn to debt, with the first option oftentimes being a credit card. Unfortunately, credit cards are becoming increasingly scarce as credit card issuers are involuntarily reducing credit limits or outright closing accounts altogether.
Just look at the key takeaways from this credit card report supplied by CompareCards.
25% of credit cardholders saw their limit slashed and/or their card closed altogether in the past 30 days.
3 in 10 cardholders are using credit cards “more than ever” since the beginning of the coronavirus pandemic. Forty-two percent are using their credit card the same as before, and 27% are using their card less.
41% of Americans don’t know that their credit card issuer can generally cut their credit limit without notification.
This is actually something that has happened to me personally.
A Citi card with no balance and a limit of over $10,000 was cancelled for “lack of usage”. Lucky for us, this card was just the backup of our emergency fund, which is itself a backup of our regular savings.
But still.
My wife and I combined earn just over $100,000 with just student and car loans (no mortgage), and we still had a card cancelled.
What is going to happen to the people who are already unemployed and have their extra payments cut off in the coming weeks, who have the credit card that is their emergency fund cancelled out from under them with no reason?
4. 0% student loan forbearance is ending
The CARES Act allowed all federal student loans to go into an administrative forbearance at 0% interest, accruing no capitalized interest, and still applying towards forgiveness programs (a major plus for PSLF borrowers).
This has been a major relief for my family, as we have $437.71 taken out for student loans every month automatically.
We have been fortunate enough to put that money directly into our savings account each month, but there are millions more who cannot, even during the student loan holiday.
And that holiday comes to an end on September 30.
How desperate are borrowers going to be when these outsized payments start again in October?
People were already behind on millions of debt payments all the way back in April, with 15 million credit cards and 3 million auto loans showing no payments by the loan holders. How are they going to pay yet another bill when they can’t even pay the ones they have?
5. Student loan servicers are changing.
A big shock is coming to the student loan world, and hardly anyone knows about it.
There are currently 9 student loan servicers (the shockingly horrible companies that manage your payments).
Well, a couple of weeks ago, the Department of Education quietly announced that just 5 servicers were selected to be part of the next iteration of loan management. And of those 5, just 2 were from the original 9, MOHELA and Maximums.
Nelnet and Great Lakes have officially confirmed that they were not chosen, with Nelnet promising legal action against the decision.
We are frustrated and disappointed by this decision and the lack of transparency in the process and will pursue every legal avenue available to ensure that students have the high-quality service they’ve come to expect from us. The federal student loan program is very complicated to administer, and to simply throw away the training and experience of Nelnet, Great Lakes, and our dedicated associates is a recipe for an implementation disaster that will negatively impact borrowers.
I also did some digging and found that FedLoan Servicing, aka PHEAA, had their contract renewed in late 2019 for two years. (This is great for PSLF folks, as FedLoan is the sole servicer for that program.)
The new contract for the new servicers is set to start in December. That means millions of student loan borrowers with hundreds of billions of dollars in outstanding debt will need to be migrated from multiple servicers to multiple other servicers in less than half a year!
Combined with the lawsuits that will inevitably be filed, and this has all the makings of a stereotypical governmental clusterfuck and a half.
Conclusion
The entire country is going to face an uphill battle during the second half of this year.
For student loan borrowers, there is the psychological battle of paying money back for an education that might not even get you a retail job (if there are any left in a year).
If the HEROES Act or some other legislation doesn’t get passed that actually helps regular people (not companies), then we are all in for a world of hurt.
Related Articles
Overcoming the Shame of Student Loan Debt
The Basics of Public Service Loan Forgiveness
Don’t Pay Off Your Student Loans
How I Still Have $135,000 in Student Loan Debt (Even After 21 Years)
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This article is for informational purposes only and should not be considered Financial or Legal Advice. Not all information may be accurate. Consult a financial professional before making any major financial decisions.