Housing prices and inflation increase pressure on student loan repayments – InsuranceNewsNet
As the Biden administration plans to extend the student loan repayment pause and write off some loan debt, some advisers say their clients are anxiously awaiting news as inflation rumbles.
A loan payment suspension was enacted more than two years ago for 41 million borrowers, who are saving $5 billion a month in payments. The hiatus is set to expire at the end of August unless the Biden administration extends it again. The administration also plans to write off likely $10,000 in student loan debt, though progressives are asking for more.
In the meantime, borrowers have been able to do things they’ve been putting off, like buying a home or improving their tenancies, and may become financially strained as payments start to restart.
Aaron Clarke, a CFP practicing in Ashburn, Va., near Washington DC, said he has clients and friends with hundreds of thousands in student debt, but people of all incomes also have reasons. to worry about the expiration of the suspension as real estate. prices and inflation have eaten up some of their financial cushion.
“If you look at current household income ratios, the current amount Americans are spending on their mortgage alone, I think, is 31% on average,” Clarke said. “Your total debt is supposed to be less than 28%. And the reason they can afford it is because they haven’t had to pay student loans for the past two and a half years.
You will plunge the country into financial failure because people will not be able to repay their debts.
—Aaron Clarke, CFP
Meanwhile, the economy has become more difficult, with inflation rates at their highest level in four decades. Clark used to advise ultra-wealthy clients and turned to making financial education accessible to all incomes at a new company, Gig Wealthy.
“So my personal issue with reactivation is that you’re going to do it on top of inflation,” Clarke said. “You’re going to plunge the country into financial failure because people won’t be able to repay their debts.”
The New York Fed echoed that concern not only because of inflation, but also because many people in the sectors hardest hit during the recession struggled to meet their expenses and save. , according to an analysis conducted for the Fed by Liberty Street Economics.
“Even though most have an automatic pause on their student debt payments and thus avoid defaults on these loans, student borrowers perceive a higher risk of missing a required minimum payment on other outstanding debt,” according to the analysis, citing the young age of student borrowers. “These groups are those who have experienced the greatest financial hardship during the pandemic, with young workers working disproportionately in the hardest hit sectors of the economy, experiencing larger increases in their unemployment rate and a higher proportion low number of young workers eligible for unemployment insurance. enlargements.
In fact, borrowers who received other debt relief, such as a discount or arrears on a car loan or credit cards, were more likely to be delinquent because they face overall financial hardship. . Those who received the other relief had a 23.2% chance of missing a payment, compared to 7.8% who did not receive debt relief, in addition to student loans.
“This suggests that borrowers who received temporary relief are financially worse off and more likely to have needed financial support,” analysts said. “They remain more financially vulnerable and expect a higher level of financial insecurity in the future.”
Borrowers who used an income-driven repayment plan were less likely to be delinquent, the Fed researchers said. This program allows borrowers to reset their payments based on their income and family size.
It’s just one of many options for borrowers, according to Jason Anderson, whose Kansas firm Gradmetrics works with families and college and student loan planning counselors.
Anderson advises breaking down a repayment strategy into two considerations: Is the overall strategy to pay off the debt as quickly as possible or to pursue loan forgiveness?
For borrowers considering loan forgiveness, payments not made during this period are still eligible for the Public Service Loan Forgiveness Scheme, which forgives the remaining balance on direct loans after making 120 monthly payments within the part of a qualifying reimbursement plan while working full-time for a qualifying employer. .
“For these borrowers, deliberately not paying will bring them closer to loan cancellation while keeping money in their pocket,” Anderson said. “These funds can be diverted to other uses, such as a nest egg, down payment, retirement savings, etc.”
For those who want to pay down debt, the payment pause can “increase” payments toward principal while interest on federal student loans is suspended, he said. Customers can pay off the loans at the highest interest rates first, the “debt avalanche” strategy; or build momentum by paying off smaller balances first, the “debt snowball” strategy.
Anderson said borrowers should run scenarios on the right repayment strategy, either by contacting a professional, such as a certified student loan professional, or by using tools such as the Department of Education’s loan simulator. .
Some overwhelming loan balances
Brittany Mollica is a certified student loan professional with Hilltop Wealth Advisors in the college town of Chapel Hill, North Carolina, which has clients with student loan balances of up to $400,000, mostly people in the medical field. These clients sometimes make over $400,000 a year, but they can make a lot less and will really suffer from cash flow problems when payments resume. Balances of $100,000 can be just as overwhelming depending on their income, cost of living and family situation.
Mollica advises clients to hold refunds until the pause and forgiveness options are established.
During the break, she suggested clients work with a financial professional to balance debt repayment with other financial goals. They can also reevaluate their payment plan with a view to switching to an income-driven plan, or exiting one, before the payment pause is lifted.
The uncertainty is even greater for parents planning their children’s education. Planning begins when children are young, even before college is a given in the child’s future. The child can pursue something else or be eligible for big scholarships if they follow the university route.
“Generally speaking, we make sure our clients first save enough for themselves because their children can get student loans if needed, but they can’t get a loan for retirement,” Mollica said. “Next, we will balance using tax-efficient ways to save for college, like 529 plans, with more flexible options, like brokerage accounts.”
Kirsten Crane Cadden, CFP at Warren Street Wealth Advisors in Huntington Beach, Calif., also advises clients not to start payments during the break. She recommends saving money for emergencies.
“If a borrower is concerned about resuming loan payments,” Cadden said, “I would recommend that they start setting aside the equivalent of the monthly student loan payment in a savings account now to resume usual, prepare your budget and have a cushion if needed.”
Steven A. Morelli is editor for InsuranceNewsNet. He has over 25 years of experience as a journalist and editor of newspapers and magazines. He was also vice-president of communications for an association of insurance agents. Steve can be reached at [email protected]
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