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US Consumer Impacted by Student Loans Restarting

Strategas Washington Policy Research

After a three-year hiatus during the COVID-19 pandemic, student loan payments will restart in October. The Biden administration’s efforts to enact broad student loan forgiveness were stymied by the Supreme Court, but the administration is taking other steps in order to lessen the burden of student loan payments for some individuals.

The debt ceiling deal enacted in June included a provision requiring student loan payments to restart in October (with interest beginning to accrue in September), ending the three-year moratorium on payments and interest since the start of the COVID-19 pandemic. Restarting these payments will put some strain on the US consumer, as the average monthly payment is estimated to be $383. However, the Biden administration is taking steps to reduce or eliminate the payments for some borrowers, particularly low-income borrowers, which will mitigate the overall impact.

Large-scale student loan forgiveness was struck down by the Supreme Court.

Last fall, the Biden administration introduced a plan to provide student loan forgiveness of up to $20,000 for those individuals making $125,000 or less (or $250,000 for those filing jointly). However, the Supreme Court ruled at the end of June that the forgiveness plan was unlawful as the administration had exceeded its authority under the statute cited to implement the program.

In response, the president announced several initiatives to reduce the impact on borrowers of student loan payments restarting.

These include:

  • Implementing an on-ramp repayment program in which borrowers who miss payments will not be reported to credit agencies for 12 months, beginning October 1, to prevent them from going into default and having their credit impacted. Although interest will continue to accrue, some borrowers may not make payments given the lack of default risk.
  • Implementing a new income-driven repayment plan (the SAVE plan), which will be fully in place by July 2024 and will require undergraduate borrowers to pay only up to 5% of their disposable income rather than 10%, with loans forgiven after borrowers pay for 20 years. (Graduate borrowers will still owe 10% and loans will be forgiven after 25 years of repayment.)
  • Increasing the threshold of income protected from payment on existing student loan programs from 150% to 225% of the federal poverty level by October 1. As a result, a single borrower earning less than $32,805 will owe $0.
  • Forgiving interest costs that are greater than borrowers’ monthly payments by October 1. This will prevent loan balances from increasing. The administration estimates that 70% of borrowers will benefit from this change.

Taken together, the US is moving back to a system in which student loan borrowers will need to begin to make payments.

This represents a change from the pandemic era and is likely to place an additional burden on the US consumer at a time when excess savings are being drawn down and inflation remains persistent. However, the Biden administration is working to minimize the burden through a series of existing and new programs that will be implemented over the course of the next few months and the next year.


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