(Bloomberg Businessweek) -- The pause on student-loan payments has been a financially transformative experience for many Americans, allowing them to pay down debt, improve their credit scores and save for the first time.
But with the forbearance period scheduled to end May 1, those struggling under mountains of college debt fear they'll slip right back into precarious financial positions.
Since the government suspended payments on federal student loans in March 2020, the average credit score among affected borrowers rose to 668 from 640, according to an analysis by California Policy Lab and the Student Loan Law Initiative. Nearly half of borrowers also reduced their use of credit cards during that time by an average of 23%.
“It's the first time in my life I'm feeling like an adult,” said Jennifer Nagle, a 38-year-old in Michigan who graduated college with more than $60,000 in student loans, two-thirds of it federal. “I have a savings account and there's money in it. After being a broke millennial for so long, that was astounding.”
Before the pandemic hit, she'd been paying about $600 a month on her federal loans and $200 toward her private ones, while her husband had $500 payments each month for his $85,000 in federal loans. With the absence of those federal payments, and the addition of a better-paying job for Nagle, they were able to knock out $5,000 in credit-card debt and her entire $15,000 balance in private student loans.
They're almost done paying off a $10,000 car loan too. Nagle said her credit score has gone from under 600 to a very solid 725.
“It's been life-changing,” she said. “We're free of most of our debt because we could divert student-loan payments to paying off debt.”
Welcome Reprieve
What started as a brief pandemic lifeline has morphed into much-needed respite for a generation that's become defined by its indebtedness.
At the end of 2021, about 43 million Americans owed an estimated $1.6 trillion in student debt. The forbearance saved them about $37.8 billion in interest payments through the end of last year, according to the Bureau of Economic Analysis.
“With the student loan repayment freeze, borrowers have the ability to take the money that they're not putting towards student loans and invest it for their future,” said Shelly-Ann Eweka, senior director of financial planning strategy at retirement giant TIAA. “It gave relief to those who really needed that relief, and those who happened to not need as much relief were able to take advantage of putting some of those casual savings towards other goals.”
About 85% of those with federal student loans also have obligations on other forms of debt like auto loans, mortgages, credit-card debt and student loans ineligible for the pause, the California Policy Lab and Student Loan Law Initiative study found. The median balance for that other debt was $19,121.
Necia Murchison, a 37-year-old in Oregon, graduated college with about $70,000 in student debt, $15,000 of that in private loans, and had to file for bankruptcy after a medical issue—and lack of health insurance—drained her finances. The bankruptcy judge let her write off about half of her private student-loan debt, but after paying down it for years, she still had a $29,000 balance for federal loans at the beginning of 2020.
“I came from a very low-income family, and it was always the expectation that college is your own responsibility,” said Murchison, who works in administration for the state court system. “I had to really rely on student loans for everything.”
After Murchison got married and combined finances with her husband, who didn't have any student-loan debt, her income-based monthly payment rose to $1,190 a month. That was a significant hurdle to paying down the $28,000 in credit-card debt they had when the pandemic began.
During the forbearance, she was able to reallocate that money to her credit-card obligations and has now paid off half. Plus, she and her husband refinanced their house and were able to pay for half of a new electric car in cash.
“Our credit scores have just skyrocketed in the past two years,” she said. “If those student-loan payments had stayed in place there's no way we would've been able to do that.”
Long-Delayed Goals
The common joke is that millennials spend too much on avocado toast, but in reality an unfortunate combination of economic forces has made certain financial goals much more difficult for the generation born between 1981 and 1996, with school-related debt one of the largest factors.
Even before the pandemic, one in five adults with student loans were behind on payments. At the same time, real-estate prices have surged, with average home values increasing more than 20% in the past year. This has been a boon for those already in the market, but pushed home ownership further out of reach for those who aren't, even as rents continue to rise.
“The moratorium really helped households to get through the hard times,” said Yelena Shulyatyeva, senior U.S. economist for Bloomberg Intelligence.
Anthony Portesy, a 35-year-old lawyer in Long Island, New York, has struggled to save enough money to buy a house, with his student loan payments at more then $700 a month.
When the pandemic first started, his debt for law school—which cost about $43,000 a year—had ballooned to $50,000 more than when he graduated, thanks to an 8.5% interest rate.
Without that monthly burden, he's been able to pay off his $1,500 in credit-card debt, max out his Roth IRA and start saving for a home.
“I can start thinking about getting married and having a family,” he said. “It's been able to make me feel like a more productive member of society.”
Looming Return
But with student-loan payments scheduled to resume on May 1, millions of Americans are preparing once again for a significant strain on their finances just as inflation is soaring and rates on everything from mortgages to credit cards are going up. The White House has indicated that a further extension is possible, but so far, no announcement has been made.
When payments do resume, delinquency rates could surge back to previous highs with 10% or more of debt past due, according to a recent analysis from the Federal Reserve Bank of St. Louis. During the pandemic, 83% of borrowers whose balances were increasing prior to the pause didn't make any progress on paying down their loans, the New York Fed said in a recent report.
About 7.8 million people—one in three borrowers—are at high risk of missing a payment, the California Policy Lab and Student Loan Law Initiative study found.
Various proposals to cancel student loan debt have circulated in recent years, without any concrete action or bipartisan support. President Joe Biden ran on a promise of forgiving at least $10,000 in student debt per borrower, and proponents say that could help stimulate the economy. Critics argue that it's unfair to those who have already paid their student debt in full and would create even more inequality between those who have gone to college and those who have not.
Yet cancelling student debt would be a godsend for those like Joanna Woronkowicz in Bloomington, Indiana, who have struggled to make ends meet during the pandemic.
The 40-year-old professor and her husband were paying about $2,000 a month total in student loan payments at the beginning of 2020. The pause came right when they needed it most, as Woronkowicz had a baby during pandemic and had to take leave—most of it unpaid—to care for a newborn and two other young kids. Her husband had to keep paying about $1,000 a month on his private loans, but the freed-up cash went a long way.
“The student loan pause was an enormous help for my family,” she said. “We were a dual-income family, and all of a sudden we didn't have one of our incomes.”
She plans to go back to work soon but then there will be an additional $3,000 a month in childcare expenses—plus the resumption of student debt payments.
“We have a lot of expenses with the little kids and the student loans,” she said. “It's going to be a big deal for us when they come back.”
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