What the Debt Ceiling Deal Means for Student Loan Borrowers

The bipartisan debt ceiling deal signed by President Joe Biden on Saturday finalized the end of the administration’s three-year-long federal student loan payment pause, meaning some 45 million loan borrowers will have to resume payments by the end of August.

Although the Biden administration has repeatedly said that the final payment pause would end within two months of June 30 since it was first announced in November, many were unsure it would happen because the pause has been renewed nine times across both Biden and Trump’s administration. GOP lawmakers have been pushing to end the pandemic-era pause and all its extensions for years, which many borrowers say has been a huge help to get out of debt and recover financially.

Recently, Republican House Speaker Kevin McCarthy noted that the pause has cost the federal government $5 billion in foregone revenue every month. The current debt ceiling bill explicitly prohibits the Education Department from implementing any extensions on the pause.

“I think [the extensions] are the primary reason the debt ceiling negotiation package had both sides commit to this being a real end,” Michael Dinerstein, a University of Chicago economics professor, says. “In the past, the executive branch has often unilaterally extended [the payment pause].”

The law’s text specifies that the payment pause “shall cease to be effective” 60 days after June 30, which means borrowers will have to resume loan payments at the end of August. Here’s what could happen then:

What effects will the bill have on borrowers?

How the renewal of student loan payments in a few short months will affect people is largely uncertain, but Dinerstein and other economists have been analyzing potential outcomes. One theory is that because many loan borrowers have increased debt in other forms, it could be a challenge to pay off.

The number of people taking out mortgages and auto loans has substantially risen this year, according to Dinerstein, but people are still struggling to pay off debt. Americans are making late car payments at higher rates today than they have since the Great Recession, according to the New York Fed. As inflation rates surpassed incomes throughout 2022 and early 2023, Americans were going into credit card debt at alarming rates, largely over groceries and other essentials.

“I’d like to think that it could be driven by people reacting to changed lives since the pandemic started,” Dinerstein says of the increase in credit card debt and late payments.

Some borrowers worry about how they’ll make payments, particularly since they’d anticipated partial or full debt relief under Biden’s plan to clear up to $20,000 in debt per borrower. Dinerstein mentions that it may not impact people whose earnings have risen since the pandemic.

Some have also criticized the outdated payment systems that lenders previously used to collect loan payments and that could cause issues as repayments begin. With over 40 million borrowers estimated to begin repaying their loans, worry grows that borrowers will face confusion over how, when and how much to pay, after such a long pause. The federal government has also slashed significant funding for loan servicers which opponents argue will impede on the customer service borrowers receive.

“A few of the servicers that receive the payments and administer the loans, are actually no longer in business,” Dinerstein says. “There are general worries about disruption, and it could take a few months for people to figure out how to pay.”

What if you can’t make your loan payments?

A popular choice for borrowers who may not be able to make monthly payments is signing up for an income-driven payment plan, where the monthly payment is dependent on the borrower’s income and can be adjusted if their income fluctuates.

Loan forgiveness, deferment and forbearance are also options for some people experiencing financial hardship. Borrowers can also consider consolidating their loans, which could help them by extending the repayment period.

Read More: When To Refinance Student Loans?

Greater impacts

Debt relief proponents have advocated for the continuation of the pause until Biden delivers on his promise to cancel thousands in loans for borrowers. A looming Supreme Court ruling will dictate whether Biden’s plan, which has been blocked since last year, is constitutional or not. A decision is set to be decided this month, but with a conservative majority court, the plan is expected to face hurdles.

How the end to the payment pause will affect non-borrowers and the general U.S. economy remains uncertain. Millions of Americans may have less disposable income if their loan payments resume, which could theoretically ripple into the economy and limit recreational purchases. On the upside, that could help reduce price inflation, Dinerstein points out.

“Student loans are a large source of debt,” he says. “It’s large enough that they could start to have an aggregated impact, but I think it’s a bit of a wait-and-see.”