For Millions of Student-Loan Borrowers It's Time to Pay

0:05Millions of Americans borrowed money from the federal government to go to college. Almost 43 million of them are still paying that money back. It's a hard number to conceptualize, right? But the way I think about it is that if you don't have student loans yourself, then you probably know somebody who has student loans. Our colleague Oyan Adedoyan covers personal finance. And for the past five years, she says paying those federal student loans felt more or less optional. The Biden administration will extend the pandemic era freeze on those loan payments through August. We're coming off of the piggyback of the pandemic, right?

0:42And that was a period where student loans virtually didn't exist. There were a lot of starts and stops when it came to student loan payments. You know, a lot of people were put in forbearance. A lot of people were put on pause. And so it seemed like we were in this very different, almost twilight zone effect when it came to the world of the pandemic. state of suspension. Yes, exactly. We were all kind of like, you know, fumbling about in outer space, not sure what the rules were. And now it seems like we're back on earth. We're back in reality.

1:18That's because last month, the Department of Education made an announcement. Federal student loans are officially being referred to collections again. Millions of people now have to come up with the money or lose more of it. This is part of a broader effort to roll back loan forgiveness After years of leniency, the government is taking a different approach. So if you were to sum up the government's message right now to borrowers, that message is? It's pay up or reap the consequences.

1:52Welcome to The Journal, our show about money, business, and power. I'm Annie Minoff. It's Wednesday, May 28th.

2:05Coming up on the show, loan payments are back. Are borrowers ready?

2:25About 5 million federal student loan borrowers are considered to be in default, meaning they haven't made payments in over 270 days. And earlier this month, the Department of Education put those borrowers on notice. If they didn't start paying, their debt could be sent into collections. If borrowers do go into collections, what could that look like? If they do fall into collections, then that means that they could get their wages garnished, which means, you know, money coming right out of your paycheck, their tax refunds may be withheld, and other federal benefits like Social Security could also be diminished or taken away.

3:05Defaulted borrowers could have their tax benefits withheld starting next month, and they could see up to 15 percent deducted from their paychecks later this summer. Secretary of Education Linda McMahon said that the department is making these moves to protect taxpayers, adding that they shouldn't have to serve as collateral for, quote, irresponsible student loan policies. The government has been trying to help Americans pay for higher education for decades. The federal student loan program that we're familiar with today dates back to 1965. And what was the theory behind that? Like, why underwrite people's education in that way?

3:44So higher education was seen as a means to propel people into different socioeconomic statuses to kind of change the course of their lives. And so the idea, at least politically and socially at the time, was that if I go to college, then I might get a better job than my parents had or be able to propel myself into a higher tax bracket later in life. The whole general opinion was that college is a public good, and therefore the government should subsidize that in some way. And that's how Kristen Pickett thought about her student loans. So my loan began with my undergraduate degree. Kristen graduated from college in 2005.

4:27She works part-time as an adjunct professor and program director and until recently worked at a nonprofit. She was the first in her family to go to college. And while she got some financial aid, it wasn't enough. Middle of my freshman year, I was pulled into the financial aid office with this, either you take loans or you can't go to school anymore. So I took the loans and in my head, you know, early 2000s was like, oh, you're going to graduate and have this great job. And so I'm thinking, if it's like$500 a month, that won't be a big deal, right? Kristen graduated with her bachelor's and then went on to get her master's degree.

5:05She even went for a second master's that she didn't finish. She thought the additional schooling would help propel her into a higher paying job. I thought that in the end it would move me forward and advance me in my, you know, that in my pay it would be some kind of difference, But it wasn't. Instead, she found herself paying down about$170 ,000 of student debt. When you kind of zoom back and think about this debt that you've carried over the years, how do you think it's impacted your decisions and just the way you've lived your life? I remember when I got my first job as a professor in 2008, and I had, like, an adult job with adult pay.

5:51Like, that was the best pay I had had. I remember I went to get a car, and my uncle had to co-sign because I had this huge student loan debt. When Kristen and her partner bought their house, they decided it would be better if Kristen wasn't on their mortgage application because of the amount of debt she carried. I'm not on her house because my student loans would actually impact our payment. And then in 2020, Kristen and other borrowers like her got an unexpected break. The pandemic hit. And the Trump administration announced a pause on federal student loan payments. Did you take advantage of that pause?

6:31I did. My partner and I discussed it, and we decided, like, it was a good thing for me to not pay them during the pause because I was able to do things I hadn't been able to do, like pay my car off and get ahead on medical bills, like things that I wouldn't have had the ability. So I took advantage of it. I felt like I actually was an adult with an ability to take care of things. How old were you when you were feeling like, yes, I've got this, I'm an adult? I was like 35, 36, something like that. So, but it just felt good to be able to be like, okay, my car payment's usually 250. And because I'm not paying student loans, I'm going to pay 500 on it.

7:14So I paid my car off much faster. And we were able to leave the state and buy a house and do things that like - You're like living your life. Yeah, at almost 40 years old, it was a great feeling.

7:33And for some borrowers, it seemed like that great feeling could become the new normal. Using the authority Congress granted to the Department of Education, we will forgive$10 ,000 in outstanding federal student loans. The Biden administration was pushing for debt forgiveness. But in 2023, that plan was blocked by the Supreme Court. Other efforts to lighten the burden of federal student loans also hit legal snags. And so later that year, Biden's Department of Education announced that borrowers would need to start repaying. But it gave them a year to ease back into it. The Biden administration decided to give borrowers another year, known as the on-ramp period, where they could make payments if they wanted to or if they were able to, but any delinquencies or late payments were not being reported to credit bureaus.

8:24So it was kind of like soft launching student loan payments again. But now, that grace period is over. How that's hitting borrowers is next.

8:54Student loan repayments officially restarted back in 2023. The problem was that many borrowers didn't know about it. People had gotten used to not paying for at least three years by that point. And a lot of people maybe tuned out. A lot of people moved. And so they weren't even getting these notifications from their loan servicers, which are companies that collect student loans on behalf of the government. You know, they weren't getting maybe updated emails that, hey, it's an on-ramp period. You might want to start paying your loans again. They weren't getting phone calls. They weren't getting letters to the right address.

9:31And so this on-ramp period, though set out with good intentions, caused a lot of confusion for borrowers who weren't really sure what was happening with student loans. Were they on again? Were they off again? Contributing to that confusion was the fact that borrowers who didn't start repaying didn't face any consequences. Remember, during that on-ramp period, missed payments weren't reported to credit bureaus. But late last year, that changed. My credit score failed 250 points, y 'all, two weeks ago because of my student loans. Guess who's just goddamn crying because her credit score went from a six to a four?

10:09Me. Like, what do you do if you wake up and your credit score just plummets because of your student loans? The interesting thing about student loans is that, unique to other credit or borrowing products, Student loans don't get reported to credit bureaus until they are 90 days late or more. So if you've missed one month or two months, you might not even know that until you've missed three months of payments. And at that point, it can really start to impact your credit score and other factors of your financial health. So a lot of these people realized that they were more than 90 days delinquent on their student loans in like February or March of this year.

10:54And this month, some defaulted borrowers could see even more serious consequences. Their loans could go into collections.

11:05Kristen isn't in default. Her loans are currently in forbearance, but she is worried. If you did have to start repaying your loans at this point, what would that mean for you? Well, it would mean a lot of things. Number one, I've gotten adjusted to not having that like$300 to$400, whatever it might be, payment. That money is spent very differently now than it was in 2020 when I was paying my loans. You've gotten used to having that extra cash. Yeah, and it's also gone other places. Like car insurance has gone up. The cost of living has gone up. Groceries are mind-blowing to me, like how expensive they are.

11:43even if you're, I'm a good budgeter, I'm a good, like, a coupon. None of that matters. To make room in her budget for loan repayments, Kristen would need to pull back her spending. And with millions of borrowers potentially doing the same thing, economists are worried that all that belt tightening might start to impact the economy. Economists at Morgan Stanley recently estimated that between$1 and$3 billion in borrowers' monthly spending could soon be redirected to student loan payments. That could be enough to impact the GDP. A lot of the people who were experiencing the payment pause of the pandemic, they were going out in the economy and spending money.

12:26They were maybe buying houses or getting cars or, you know, going on a vacation, feeling a sense of freedom with their money that they hadn't felt in years. And, you know, I've already seen it with borrowers that I've talked to who have experienced the consequence of having their credit score drop. You know, that is a really big deal for someone who maybe just got a home or was about to qualify for a home. People are graduating. Yeah. Like maybe right now as we're having this conversation. It's graduation season. Yeah. Right. And they're graduating with student loan debt. Do you have any advice for them?

13:03Yes. People who are graduating right now or have recently graduated have the most amount of options, right? They can stay informed and see in real time what the policy changes are. So, you know, figuring out who your student loan servicer is and how many payments you've made or what your payment amount is. It's kind of the same thing that a lot of financial advisors say when it comes to financial health. It's about like checking these things every day, like check your bank account every day, check your credit card statement and your credit score regularly. Make sure that you know exactly what's happening and where all of your money is going.

13:39Don't ignore it. Yes, exactly.

13:53That's all for today, Wednesday, May 28th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Justin Layhart.

14:07Thanks for listening. See you tomorrow.