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What does the debt ceiling agreement mean for student loan payments?

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Borrowers will need to start paying back their student loans by the end of August as part of a provision included in the debt ceiling deal signed by President Biden Saturday. The legislation ends a three year-long student loan payment pause introduced during the COVID-19 pandemic.  

The deal will also prohibit Biden from issuing another extension on the freeze, which he has done numerous times since 2020.  

Why are payments resuming?  

Ending the freeze on student payment loans is just one of numerous provisions included in the legislation, which Biden signed after weeks of negotiation with congressional leaders. By approving the legislation, the U.S. averts a default on the federal government’s debt. If no agreement was reached, the Treasury Department warned the government would run out of cash to pay its bills this past Monday.  

“No one got everything they wanted but the American people got what they needed,” Biden said in a press release issued by the White House. “We averted an economic crisis and an economic collapse.” 

Ryan Brewer, associate professor of finance and head of the IU Division of Business in Columbus, said historically, the government has run up a deficit when the U.S. faced things — such as pandemics and wars — that require the government to spend more capital than they have available through taxation or issuing bonds. To understand how the government can spend more money than they have available, Brewer provided a comparison on a smaller scale.  

[Related: Indiana will tax student loan forgiveness. What does this mean for Bloomington residents?]

“You graduate from college, you get a new job, and let’s say you decide you like the job, like your location and you want to buy a house,” Brewer said. “Because buying a house requires so much capital, you typically have to get a loan to do that. So, part of that responsibility is that over time, you have to pay the loan off.”  

The agreement will suspend the U.S.’s borrowing limit until January 2025 and limit government spending. The deal will allow the Treasury Department to borrow money to pay the debts it has already incurred. If Congress had not come to an agreement last week and the government defaulted on its debt, Brewer said there would have been massive financial consequences – both domestically and internationally.  

“As soon as we fail to perform on servicing our debt, that would dynamically cause many bad things to go around the world financially,” Brewer said. “There would be a pullback worldwide and in the immediate aftermath, it would cause a pretty severe recession.”  

Why was there a pause on payments?  

Phil Schuman, executive director of financial wellness and education for IU, said the original freeze on student loan payments was implemented during COVID under the Trump administration March 20, 2020, due to economic and financial uncertainty across the country. In addition to pausing payments, the government also issued a zero percent interest rate on loan payments, meaning interest on unpaid student loans would not accrue during the time of the freeze.  

The Biden administration continued to extend the freeze since its introduction in 2020. However, Biden had previously stated the freeze likely would end around August 2023 anyway.  

Schuman said there has not been another freeze on student loans that sets a precedent for the agreement. The pause on student loan payments has been controversial among some politicians in recent years. For instance, after Biden extended the freeze in April 2022, House Rep. Bob Good (R-Virginia), introduced a bill to end the pause, arguing the freeze benefited those in higher social and economic classes rather than low-income individuals. Most recently, the Senate passed a bill to block Biden’s student loan forgiveness program — which is not included in the debt ceiling agreement — while the legislation awaits a Supreme Court decision to determine if the program can take effect.  

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Schuman said this contention can be partially attributed to arguments surrounding political motivations behind extending the pause.  

“There’s a lot of argument about whether or not the extension should have lasted this long,” Schuman said. “There was skepticism about whether or not it was actually necessary for people to have it or if it was just a political ploy.”  

What impact will this have on borrowers? 

While resuming student loan payments may help lessen national debt, Schuman said the short notice for repayments may cause additional stress for many borrowers. According to a 2022 American Psychological Association report, 66% of U.S. adults surveyed said money was a significant or very significant source of stress in their lives.   

“The reason for the extension was to basically allow people who are struggling during COVID and coming out of COVID — and we’re still struggling now — to buy some flexibility to get themselves back on their feet financially,” Schuman said. “So, we are talking about a potential mental health crisis that’s stemming from people having to make these repayments because it’s just not something they might be able to do.” 

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Student loan payments have been paused for three years, so there are many people who might have never had to make a loan payment before, Schuman said. He said there will also be people who find themselves out of the habit of paying loans or not expecting to have to start paying by the end of August.  

“You might see a lot of people backtrack and figure, ‘Okay, how can I actually make this work now, because I’ve never had to do this before and I’ve committed this money to something else,’” Schuman said. “So, I think there’s potential that a lot of people are going to struggle financially as they try to get their feet set with what’s going on.”  

Where can I find information about my student loan payments?  

For those with questions concerning their own student loan payments and the upcoming end to the freeze, Schuman recommends several resources. IU Bloomington students can contact the Student Center to learn more about grants, loans and financial aid as well as ask questions about their payments.  

IU students can also contact the Office of Financial Education to receive help figuring out what payments they need to make, who their servicer is and other loan payment information.  

Borrowers can also access important loan information — such as how much you owe, your loan provider and projected payments — by logging into their account on the Federal Student Aid website. You can then contact your loan servicer based on that information.  

“If you’re a person who doesn’t think you’re going to be able to afford those payments, you can also talk with them about what additional options you might have to lessen your financial burden each month, if needed,” Schuman said.  

[Related: Three strategies to paying off student loans early and efficiently]

One option is to apply for income-driving repayment plans, plans that set monthly student loan payments at amounts based on income and family size. On the StudentAid.gov website, borrowers can use a Loan Simulator to find repayment plans best fit to their financial needs. These repayment plans can be modified over time depending on changes in the borrower's financial situation.  

Schman also suggests borrowers contact their loan service providers with questions and requests as soon as possible because a potentially overwhelming influx of people may cause delays in service.  

“It may be hard to get a hold of somebody in an efficient amount of time,” Schuman said. “They’ve had to cut back on their staff, had to lay off the staff over the years because they’ve had nothing for them to do. So now they’re going to have to recalibrate and hire people again and that process is going to take some time.”  

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