Biden's Hand is Forced on Student Debt. Here's Why.

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Yikes.

Student debt has been such a mess over the last two years; I’m honestly not even sure how to report on it anymore.

As you might remember, the student loan freeze started in March 2020 when the pandemic lockdowns began in earnest. The moratorium has now been extended six times— with policymakers saying the last couple extensions would be the last… and then, invariably, extending the deadline again.

Now, the student loan freeze is set to thaw September 1st, 2022. Borrowers have been told that come September, they’ll need to start paying off their debt again. But whether or not that date will be pushed back like the six other dates before it, kind of feels like anyone’s guess at this point.

It’s been tricky for me, as a financial expert, to give people advice on how to deal with student debt because it’s been such a moving target. And obviously, even though this indecision in Washington makes it harder for me to do my job, this indecision is 100 times more challenging for folks who are actually in student debt right now and are trying to figure out how to reconfigure their spending plans with a looming recession, and the potential of having to send off their student debt payments again after a two-year hiatus.

It ain't cute.

So here’s why this is such a bad look for Biden: the whole point of the student loan moratorium was to help Americans in debt. Whether or not college is worth the tuition is a whole other debate for another article, but I think we can all agree on why people go to college: people go to college in the hopes that it will help their careers, and that a degree will help them get high-paying job opportunities. The fact that this group of people are then slapped with crushing debt is a problem. It feels like a trap set for people with the best intentions. And so I do think the student debt moratorium was the right thing to do.

But here’s the thing. As we’ve been talking about on The Money Minute, inflation is soaring and one of the ways policymakers are trying to curb inflation is by raising interest rates. And loyal readers know, raising interest rates is great for savers, but hurt people in debt. So essentially, what we’re seeing play out is that Biden told student loan borrowers that he’d take care of them… and kept pushing off the date that they would need to resume payments… until the exact moment that interest rates are going up… see the problem?

And I will say, most federal borrowers have fixed interest rates, so the interest rate hikes will not affect their payments. However, it’s safe to say that everyone will be affected in some capacity, directly or indirectly. Student loan borrowers who have refinanced may be affected directly. Or, borrowers with a fixed interest rate may be affected indirectly, because as they have to start repaying their loans back, their spending plans may be tighter. Consequently, they may have to put more expenses on their credit cards, which will have a higher APR because of interest rate hikes.

You get it. It doesn’t look good. And as the November midterms approach, Democrats know it’s not cute.

Reportedly, Biden is considering giving $10,000 of relief for folks who owe federal student debt and are making under $150,000 per year. A White House spokesperson recently confirmed to Insider that Biden is still planning to announce some sort of debt relief before August 31, when the pause on payments is set to expire.

Republicans aren’t too hot on this plan. Generally, the stance of the party is that student loan debt cancellation essentially shifts the debt to the taxpayer— and that’s unfair, especially to the college graduates who have already paid off their loans. Republicans have argued that addressing tuition costs is more important than debt forgiveness, which I can absolutely get down with. But, I think it’s an oversimplification, and like so many other issues, the answer isn't either vs. or, it's both— which, in this case, is student loan forgiveness and lower tuition rates.

Here's my two cents.

With Biden’s approval ratings in the pooper, something’s got to give. His hand is forced to make some concession around student loans, and when he does, tell your friends you heard it first in The Money Minute.

xo,

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