Student Loan Borrowers Brace for Impending Restart as Debt Ceiling Deal Looms

Federal student loan borrowers could soon find themselves back on the path of repayment as the bipartisan debt ceiling deal approaches passage in Congress, putting an end to over three years of frozen payments. This development has significant implications for millions of borrowers across the country.

The compromise between President Biden and House Speaker Kevin McCarthy sets the stage for federal student loan repayments and interest accrual to resume on August 30. Notably, the deal also restricts Education Secretary Miguel Cardona from extending the payment pause without congressional approval.

Even without the debt-limit deal, federal borrowers were already scheduled to resume payments this summer. The Department of Education had initially paused federal student loan payments in March 2020 in response to the COVID-19 pandemic, keeping interest rates at 0% during the freeze. Approximately 44 million borrowers were affected by the payment pause, which was subsequently extended by the Biden administration seven times. However, the administration has been firm in its stance that there will not be a ninth extension.

President Biden’s executive order outlines a broader debt forgiveness plan, which includes canceling up to $10,000 in student loan debt for eligible individual borrowers earning less than $125,000 in 2020 or 2021. Married couples who earned less than $250,000 annually in those same years are also eligible. Additionally, borrowers who received a Pell grant while in school may qualify for up to $20,000 in debt forgiveness. The legality of this plan is currently being deliberated by the Supreme Court, as it faces several lawsuits challenging its constitutionality.

If the Biden administration prevails in court, an estimated 8 million federal student loan borrowers would receive automatic forgiveness under the one-time cancellation plan. However, borrowers would have the option to opt out if they so choose. It’s important to note that the debt-ceiling compromise does not address the broader student loan debt elimination plan proposed by President Biden.

The nonpartisan Congressional Budget Office has estimated that the overall student loan plan could cost around $400 billion, although this figure is labeled as “highly uncertain.” Other reports suggest a range between $300 billion and $500 billion. The forgiveness plan would also contribute to the nation’s already towering national debt, which recently reached a record-high of $31.8 trillion.

The McCarthy-Biden agreement to suspend the debt limit for approximately two years, coupled with certain spending cuts, passed in the House with a vote of 314 to 117. The bill now heads to the Senate with limited time for deliberation. Failure to pass the bill could result in a temporary default on some national obligations, potentially triggering adverse economic consequences. A default threat alone can lead to increased borrowing costs, as interest rates may surge and demand for Treasuries may decline. While the U.S. has never defaulted on its debt before, the nation came dangerously close to it in 2011 when House Republicans resisted a debt-ceiling increase, causing Standard & Poor’s to downgrade the U.S. debt rating.

As the debt ceiling deal teeters on the edge of implementation, student loan borrowers anxiously await the outcome, preparing for a resumption of payments and the potential impact on their financial well-being.