When Are Federal Student Loans Called? Answering your college debt questions. – Charlotte Observer | Vette Leader


Debt distress among students

Overwhelmed North Carolina borrowers are hoping for relief. will it happen


Americans owe the federal government and private lenders about $1.75 trillion in student loans, a growing debt burden that shapes the lives and finances of a generation of college goers.

During the pandemic, the federal government granted forbearance on most of that debt, a pause that President Joe Biden extended for the sixth time in April and was scheduled to expire on August 31.

Now Biden is seriously considering forgiving some of that debt to offset a campaign promise to deal with the student loan crisis.

The proposal was the subject of heated debates among lawmakers, interest groups and borrowers. Some argue that cutting off credit is unfair. Others say it’s a much-needed fix to mounting debt that’s unfairly weighing on millions of Americans seeking their degrees.

How did the issue of student debt become a political flashpoint? And why did the payment pause last so long? Here’s a breakdown.

How many borrowers are affected?

About 46 million borrowers in the US have student debt. Those borrowers owe a total of $1.75 trillion as of early 2022, according to the Federal Reserve Bank of St. Louis.

In North Carolina, about 1.3 million borrowers have student loans and about $48 billion in debt, according to the Center for Responsible Lending.

What is the difference between government and private student loans?

The vast majority — about 92% — of student debt in the US is federal student loans, borrowed from the government at a fixed rate. These are low-interest, potentially subsidized loans that you can get by completing the Free Federal Student Aid Application (FAFSA).

The rest is private student debt that is taken out from lenders such as banks or other financial institutions. Borrowers on private loans have seen no pauses in payments during the pandemic and will not see their debts paid off when the President cuts federal debt.

The federal government contracts with certain loan servicers, private companies that collect and track student loan payments from borrowers.

Why has the federal student loan payment pause lasted so long?

Officials suspended federal student loan payments in March 2020; Borrowers did not have to make any payments and no interest accrued. At the time, this was one of several measures to support an economy paralyzed by the COVID-19 outbreak.

But the leniency lasted long before the country’s economic recovery.

Part of it has to do with logistics, said Rochelle Sparko, director of NC policy at the Center for Responsible Lending.

Since the suspension of payments began, major loan servicers such as Navient and Granite State have announced they will be dropping federal contracts. That means the U.S. Department of Education has to refer millions of borrowers to new service providers, Sparko said.

Now, resuming student loan payments “is becoming a challenge under the best of circumstances,” she added.

Upcoming midterm elections could also factor into the President’s decision on this issue.

What about student debt relief?

Advocates of student debt relief argue that the loans have unfairly weighed on millions of Americans.

Sen. Elizabeth Warren, a Massachusetts Democrat, argues that students borrowed to pursue a career that they believed would pay off and give them “a ticket to the middle class.”

Instead, for a variety of reasons – whether it’s a tough job market, financial hardship, or the impact of generational poverty – the borrowers they borrow to fund their education weigh on borrowers for years and sometimes decades, leaving them “hardly on the mark.” “. Warren said.

Sparko added that student debt forgiveness could help address wider racial and economic inequalities.

That’s because certain groups are more likely to take on more student debt and hold onto credit longer, according to a 2022 Brookings Institution report, which said black families are more likely to borrow to attend college.

“We know that after 20 years of repayment, black borrowers still owe, on average, 95% of their student loan debt,” Sparko said. “That doesn’t typically apply to white borrowers.”

For historically disadvantaged groups, she said, student debt is an additional and disproportionate obstacle to building generational wealth.

“The cancellation … serves as a huge piece of the puzzle in closing the racial wealth gap,” she said.

What speaks against the termination of the student loan?

Critics argue that forgiving federal loans is an unfair policy that would hurt the economy.

Marc Goldwein, sThe executive policy director of the Committee on Federal Budget Responsibility believes student debt relief could trigger a surge in spending that would exacerbate inflation and push up prices, which are already at their highest in decades.

Others warn about moral hazard — an economics term that can refer to creating an incentive to take unusual risks. According to this argument, debt relief now could lead to more borrowers in the future taking on debt that they cannot afford or are unlikely to be able to repay.

Goldwein also noted that student debt relief would address a symptom rather than a cause: In the United States, college education is expensive.

Unlike other countries where students can attend college for free or only a few thousand dollars a year, a year at a public university costs American families an average of $22,690, according to the College Board.

According to The Heritage Foundation, a conservative think tank, there are also arguments that forgiving student debt would put inflationary pressure on colleges to raise tuition. The researchers there pointed to previous studies that the increase in government student aid leads to higher tuition fees.

“Ideally, we would have a college that is affordable at all,” Goldwein said.

What did the President say about student loan cancellations?

Campaigning, Biden required $10,000 in student debt per borrower to help address the economic fallout from the COVID-19 pandemic.

“It holds people back,” he said of student loans in November 2020. “You’re in real trouble. They have to choose between paying their student loan and paying rent.”

In the April White House announcement of extended leniency, Biden said resuming payments this spring may have resulted in “economic difficulties, arrears and defaults” that “could threaten the financial stability of Americans.”

“I am asking all student loan borrowers to work with the Department of Education to prepare for a return to repayment,” he said in the announcement. “Vice President (Kamala) Harris and I are focused on assisting borrowers in need.”

When will we know if debts have been forgiven?

It’s hard to say if, when, and how the president would forgive student debt, although the president’s advisers say he will make a decision before the end of August, the New York Times reported.

The Washington Post reported Biden is considering canceling $10,000 per borrower in student loans, though his administration is concerned about the economic impact.

Some proponents of cancellation have called for more than that, saying $50,000 worth of debt per borrower is more effective in addressing the impact of student loans.

“$10,000 would be nice,” Sparko said. “$50,000 would be a game changer.”

This story was originally published July 8, 2022 6:00 a.m.

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Hannah Lang covers banking and corporate equity for The Charlotte Observer. She studied business journalism at the University of North Carolina at Chapel Hill and grew up in the same city as her alma mater.

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