Dave:
Hey everyone. Welcome to On The Market. I’m your host, Dave Meyer, and today we are going to bring you again, one of the shows I’ve been asked about a lot over the last couple of months, and that is all about student loans.
You’re probably aware of this, but a couple of years ago during the pandemic, student loan payments were paused for a while. Then about a year ago, the Biden-Harris administration introduced a proposal to eliminate a portion of student debt that worked its way through the courts, and just last week there was a ruling about it in the Supreme Court.
So all of you have been asking how these two concurrent events surrounding student loans are currently impacting the economy and how they may impact the economy and the housing market in future years. And so we’re going to talk about it today.
To help us understand what’s going on, we’ve brought in Sarah Ewall-Wice, who is an economic policy and politics reporter with CBS News, who’s going to fill us in on the nuts and bolts of what has been going on in Washington over the last year, and share some insights that she’s dug up about different analyses on how this could all play out.
Now, I just want to acknowledge that this is a politically charged issue and in this show, our goal is to be as objective as possible and really just to focus on the economic implications of these rules. And so that’s what this show is going to be all about. We are going to take a quick break and then we’ll be back with Sarah Ewall-Wice.
Sarah, welcome back to On The Market. Thanks for being here again.

Sarah:
Thank you for having me.

Dave:
We are here under very different conditions now, now to talk about the recent Supreme Court ruling about the student loan cancellation program. For anyone who’s not familiar with what’s been going on, can you give us just a brief primer?

Sarah:
Sure. So President Biden had campaigned on this idea of giving relief to student loan borrowers. Student loan debt is the second-largest debt in the United States, and so it’s a huge problem for millions of Americans.
Last summer, he came up with this idea on how he would proceed on this and it would give about $10,000 in relief to borrowers, for federal student loan borrowers, let’s be specific, who are making less than $125,000 for heads of households and couples. It was about 250, and if you were a Pell Grant recipient, these are folks who are lowest income, Americans that could be debt relief up to $20,000.
So of course, they announced this big proposal. It got a lot of excitement from Democrats, a lot of pushback from Republicans, and there were of course, this idea that it would end up in the court system. It made its way through the legal system and the Supreme Court ruled that it could not be done.
They struck down the president’s student loan debt forgiveness plan, and so we’re back at basically part one, where the president is still saying, “The fight continues.” But we have to go a different route to get there, and these millions of Americans will not see that debt relief that they thought they were going to see just a few weeks ago they were very excited about.

Dave:
Presumably President Biden, the reason he was pursuing this was to ease some economic strain on student loan borrowers. What was the reason? What’s the counter argument against it?

Sarah:
Well, I mean Republicans and some groups were basically saying that this is a bailout for folks who had signed up, had taken out this money to go to school, and the reality was is they signed up knowing they would have to pay it back. And so this was a handout to a group of people who presumably would also support the president in his reelection bid, and they were very unhappy about it.
The fact is this debt relief plan, the Biden administration estimated it would cost upwards of $350 billion. Another nonpartisan group, the Congressional Budget Office, that agency estimated would be upwards of $400 billion. So this is a very pricely plan that they had been pushing. Of course, when you look at other things that have gone through the federal government, we’ve seen other bailouts that have cost more than that, but this one in particular got a lot of pushback, especially at the time we were seeing trillions of dollars in national debt.

Dave:
So Biden decided to basically use the executive action approach because there was not bipartisan support for this plan, and the way he went about doing it was unconstitutional, that’s what the Supreme Court said just last week?

Sarah:
Yes. So what he decided they were going to do, and it took them a long time to come up with their plan. They started examining it when he took office in 2021, but they didn’t make an announcement for more than a year, and they kept kicking the can down the road with that federal loan pause, that was done because of the pandemic.
So they finally announced this forgiveness plan that they had been examining and talking about, at that the president himself had even raised questions about the legality of doing something like this. And so they tried to do it under the Heroes Act as a 2003 law, that they said they would have the standing after doing their thorough analysis.
And so they put the plan out there. They actually had 26 million people apply for relief under this plan looking at this specific law. And then of course, 16 million of those people were actually pre-approved. So had it been upheld, they would’ve immediately gotten that relief. The court went through this, they looked at the legal argument by the president’s team and they said, “No, the education secretary does not have the authority under this specific law to,” What they said, “rewrite statute and do this forgiveness plan.”

Dave:
And it sounds like the Biden administration is not giving up though. So are they trying a different legal tack to try and accomplish the same aim?

Sarah:
Pretty much. They’re going to keep going with this. It’s a political battle that I think is going to continue to play out specifically on the campaign trail. But right after the Supreme Court announced their decision in this case, which is specifically six laws or six states that had sued that came to that decision, they went back and they’re like, “We’re going to try and do this again. We’re going to try and do it under the Higher Education Act, different law, from 1965 and then we’ll go through that.”
So they basically are starting the examination process to do it through this different law. With that said, the reason they didn’t do it this way to begin with, is because to do so they’d have to go through a rule making process, so it’ll take much longer.
Like I said, they had people applying under that other plan and immediately they were like, “You guys are eligible as long as it makes its way through the legal system.” This time, it’s going to have to go through a much longer process. So that relief will be much further down the road if it is even upheld, and there’s questions about the legality of the approach this time as well.

Dave:
Okay. Great. That makes sense. So it sounds like this is going to drag out.

Sarah:
Oh, yes.

Dave:
So I do want to talk a little bit about the sort of a flip side of this, is in addition to the cancellation, there has also been a pause on student debt repayment. How does that fit into this entire situation?

Sarah:
Yes. So if you were a federal student loan borrower, the vast majority of them had not been paying their federal student loan payments. The monthly payments we’ve had before the pandemic since spring of 2020, and those were pause under President Trump because of the pandemic. Of course, President Biden kicked that can, extended that pause out until this year.
It was a number of times that they re-announced they were extending it over and over and over again as the pandemic continued, but they announced that they were actually going to end it this summer officially. When they did that whole debt ceiling negotiation that we saw play out this summer, that was actually something that they included a provision that was guaranteeing this pause would end this summer.
So for millions of Americans, about 40 million who had not been paying these student payments, the student loan payments, they’re going to have to start paying them again this fall. And interest rates, which had been set at zero for more than three years now, those will kick back in on September 1st, then in October, payments will start coming due. And depending on your loan servicer, that’s when your date is going to be to start repaying those loans.
But those loans are pretty substantial. They can be upwards of $350 on average a month. So that’s going to take a big chunk of change out of people’s pockets that they haven’t had to deal with for some three years now.

Dave:
I do want to get into the economic implications of some of these decisions, but before we move on from the specific policies, do either of the pause in payments or the cancellation do anything to address the cost of college?

Sarah:
I think that’s a really important point you’re making, because no, they do not. Right now, we do know that in state tuition for college is about $10,000 out of state for people, for public schools, $28,000 a year, and we’re looking for private schools somewhere near $40,000 a year, and these two things do nothing to address that.
That is a huge challenge that both parties are aware of, and there have been proposals by both parties, but there’s no consensus in Washington that actually helps address the skyrocketing cost of going and getting a higher education.

Dave:
Yeah. That’s something that’s just always stood out to me, is that whether you, for this policy or not, either way, it’s a bandaid. It’s not actually addressing the fact that the price of tuition is, I forget the exact stat, but it grows at multiple times the normal rate of inflation and has for 20 or 30 years.
And we’ve gotten to this place where college is so unaffordable that people are put in this situation where they actually have to take out debt. Whereas 40, 50 years ago, people could theoretically at least work and pay their tuition and not have to go into debt to attend college.

Sarah:
Exactly. And one thing to think about with that is even with this student loan forgiveness plan that was struck down, it was going to deal with the people who had already taken out that debt, but we would be right back where we started if they didn’t address the root of the problem to begin with, right down the road with another continually graduating group of student borrowers that had continually amassed debt, new debt.
So in five years we’d be back at the same place in 10 years, and that part of it was never fully addressed, and I don’t think there is a solution from either Democrats or Republicans on that though. There have been, like I said, some proposals.

Dave:
Okay. Great. Well, thank you. Thank you for explaining that.
Because this show is mostly about economics, I’m curious to know, have there been any analyses done that help us understand what the economic implications of the pause ending and the cancel it, I guess the cancellation of the cancellation of the fact that there is no cancellation?

Sarah:
Yeah. So I think the cancellation of the cancellation itself is something that there, it’s just too soon to really get that full analysis on what this means for borrowers. We have seen many analysis on the cost of both the pause and the actual plan. I mentioned that $400 billion cost price tag for the forgiveness plan, and the pause itself costs around nearly $200 billion according to some analysis over the past three years.
So what this means for the economy moving forward, is it’s going to take money out of people’s pockets, which means they’re not going to be spending in the same way they were able to for the past three years. I think Goldman Sachs did one analysis that really did show, it looked at both the forgiveness plan and the pause ending at the same time, and they really kind of canceled each other out. And so that showed there wouldn’t be a major impact on the economy.
It was a very short term minimum impact, but I think once you just look at the pause itself ending, this could take a significant amount of money out of people’s pockets, because they aren’t going to have that forgiveness component at the same time. And that really raises further questions.
Right now, we’re seeing high inflation, though it has slowed some, I think this could further help cool inflation, but like I said, this is about 40 million people who are going to have to start making payments, and the average payments are, as I mentioned, nearly $400 a month for these federal student loans that haven’t gone out. And so this is going to take people away from doing other things, buying goods, buying services that have helped fuel inflation for the past couple of years as well.

Dave:
You beat me to my next question because that is, does seem to be one consequence of this, is that there will be less spending power, which obviously has negative implications across the economy and for the people who have less spending power, that’s obviously a negative outcome. But the one silver lining here is that perhaps it could help cool inflation, but obviously, there’s a lot of economic trade-offs with this type of decision.

Sarah:
Yeah. And I think the funny thing about this is there’ve been so many uncertainties and questions around what’s driving inflation to begin with, because we’ve seen soaring inflation the highest it’s been in decades, but if you look at this summer, it’s not stopping people from going and taking those vacations that they’ve been missing out on. It’s not stopping spending.
So while we’ve seen inflation cooling as the Fed’s been hiking rates for more than a year now, it really hasn’t hurt the economy in terms of people going out. Though I know that people are of course, struggling with higher prices for food and gas and other things just in general, it hasn’t stopped the bigger consumer spending that we’ve seen since this pandemic has started to dissipate.

Dave:
One thing that we as real estate focused people talk about quite a lot is the quality of housing debt. Just that mortgages since Dodd-Frank have been in a much better position, and even though there has been an increase in foreclosure since the really sort of the lull during the pandemic, there are relatively low defaults.
Do you think that this type of increase in debt service that people are going to have to pay, could spill into other parts of the economy, whether it’s credit card debt or housing debt like I’m talking about, or auto loans or anything like that?

Sarah:
I think it really does remain to be seen. I think it definitely could have some impact on all of those different things. One of the arguments for this entire forgiveness plan by the Biden administration and supporters, was this whole generation of Americans are unable to do things like buy homes, buy cars, and by keeping that money, they’re going to be able to invest it in other parts of their life. It’s hard to say how this specifically will be impacted, because it was now struck down, but that was an argument that was made to this end.
The other thing I think to keep in mind here, is while they have announced that this pause is ending, there is this point that the president made when he responded to the Supreme Court ruling, and he said that even though there is going to be the pause ending this fall, they’re working to make sure that it doesn’t have negative consequences on people’s credit for another year after this, should they not be able to make those payments right away.
So it’s kind of easing you back into these payments, so they won’t have the same people going into default after missing payments. And I think that’s supposed to last about a year that it won’t have the negative credit impact that people were definitely concerned about as they start to plan out for these payments starting back in October.

Dave:
Okay. I think I saw something about is that basically they’re not going to report delinquencies to credit agencies or is that right?

Sarah:
Essentially that is what it is. I know the education department had been working specifically on the communications that borrowers would see before the payments have to come do this fall, and they’re required to make six communications with borrowers. So that information will likely be in that. Though I’m told that the service providers, the loan servicers are don’t have that specific language yet.
The communications are ongoing, and that is what the president essentially said would be the plan moving forward for that first year. So there’s a kind of a reentry point that allows people to not be immediately hurt by the fact that they have to make these larger payments that they hadn’t.

Dave:
Do you think that… I’m trying to figure out where we go from here. And you’ve said that the Biden administration is planning a new tact. Do you think there’s any hope that there’s some bipartisan solution in the future?

Sarah:
I’m pretty pessimistic about this, to be-

Dave:
You’ve been a politics reporter for too long.

Sarah:
Potentially, yes. I’m pessimistic, but you know what? I’ll never say never. That is the one thing I will not do here in Washington. There have been proposals, we have seen proposals to make community college free, which would help with the cost of school. That was something Democrats really wanted to include in their legislative package that they did last year, but the price tag caused some of people within the party to ball at it, so that was cut from the final plan that they were able to push through.
But that was done with just Democrats, and so far it’s been very hard to see where there is bipartisan support where Democrats and Republicans can get together and actually work on something that addresses the cause of college education.
There are other things that the administration has been doing, like I said, not bipartisan. They’ve been working on some of the other forgiveness type of plans that they have or repayment plans that they have that have helped with this. Things like public service forgiveness and income driven repayment type of things. So those can help some people in terms of the borrowing that has already happens, but again, doesn’t address the cost itself.

Dave:
Got it. All right. Well, Sarah, thank you so much. Is there anything else you think our listeners should know about this situation?

Sarah:
I think something to keep in mind, not so much for the broad listeners for you guys, but the borrowers themselves who might be listening. The thing I’ve been told time and time again, the best thing to do for folks right now, is to make sure that their contact information with their loan servicer is up-to-date, with the education department is up-to-date because they’re going to be getting a lot of communications or hopefully getting a lot of communications on how this goes. 40% of borrowers are going to be dealing with new servicers since before the pandemic, so that’s something that they’re going to be some confusion about.
Another thing that I think there will be some confusion over is, we had about seven to 8 million people graduate from college while this pause was happening, so they have not had to pay federal student loans so far. And so that is something where there might be some confusion.
They might want to get in touch with the education department and servicers in terms of making sure that they’re hitting the ground running, or at least in communications, understanding what’s expected moving forward. That’s something to keep in mind.

Dave:
All right. Great. Thank you. That’s very good advice to anyone who is in that camp.

Sarah:
Yes.

Dave:
Sarah, if anyone wants to follow your reporting of this and all the other things you’re working on, where should they do that?

Sarah:
Well, I will push them to find any of my reporting on cbsnews.com. You can follow me on Twitter, it’s my last name, Ewall-Wice. E-W-A-L-L-W-I-C-E, and it’s the same thing on Instagram as well.

Dave:
All right. Well, thanks again, Sarah. We appreciate you being here.

Sarah:
Thank you.

Dave:
Thanks again to Sarah for joining us today. As she said, right now, it is honestly just too early to know exactly how this is all going to play out and ripple through the economy, but to me, there will be large economic implications to this. We just don’t know the details of it.
As Sarah said, the average repayment that’s going to start in just a couple of months is $350 a month, which is obviously a really significant amount of money that people can’t use either in consumer spending or buying a home or paying for rent or whatever it is. So I think we’re all going to have to just see how this plays out.
One of the questions I was curious about and did some research was, is just will this spread to other parts of the debt economy? As we all know, people take out car loans, they have mortgages, they have credit card debt, and I was curious just to know if there were any analyses of this.
And I did find one, it’s a year old. It comes from the New York Fed’s Survey of Consumer Expectations. And they asked respondents who had student debt. That if student loan payments were going to resume, what was the likelihood that they were going to be delinquent on it or potentially default on it? And borrowers predicted a 16% risk of delinquency in this scenario.
So to me that’s really high, obviously. 16% of people, of those 44 million people, that’s several million people who have a fear of delinquency. Obviously, I hope, I wish that on no one and hope that that doesn’t come to fruition, but if that does indeed happen, it could spread through the economy in ways that we just don’t know.
So I hope that this show is useful to you. We wanted to bring you information about what’s actually going on right now as quickly as possible, and as we find out how the impacts of both the resumption of student loan payments and the fact that there will not be student debt forgiveness, at least for now. As that ripples through the economy, we will make sure to update you on the show regularly.
Thank you all so much for watching On The Market. We greatly appreciate you and we’ll see you on Monday for our next episode.
On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, research by Pooja Jindal, copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team.
The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.