The freeze thaws, and then comes the deluge. For the paycheck-to-paycheck economy, the tide of debt obligations may be tough to navigate.
The Federal Reserve said in a note last week that roughly 60% of borrowers holding student loan debt have not made any payments on their student loans from August 2020 through December 2021.
All told, those same borrowers hold $400 billion in outstanding student loans, and they would have been paying about $2.8 billion a month were it not for the forbearance programs that have been a staple of the pandemic.
Those programs are set to expire this in August, and, ostensibly, those payments are set to resume.
But as the Fed noted in its paper, “it is possible that some of these borrowers may not be ready to resume payments once forbearance expires.” As many as 11.5 million of those borrowers may, in fact, not be able to keep up with the resumed payments schedules. In the meantime, overall credit card debt and auto loan debt has crept up, as have delinquency rates on those debt instruments.
Those trends may bode ill for student loans, but it should be noted that triangulating the Fed data with PYMNTS research shows that it may be the relatively lower income consumers who are most hard hit.
Nothing Left Over
More than 60% of the U.S. economy lives paycheck to paycheck, which means that consumers don’t have anything left over after take-home pay goes out the door to satisfy the monthly obligations.
As PYMNTS noted in recent weeks, the paycheck-to-paycheck consumers are more prone to carry debt. Specifically, they are three times as likely to revolve credit card debt and carry higher monthly balances overall. Among cardholders living paycheck to paycheck, 34% of those without issues paying monthly bills and 47% of those who struggle to pay their bills “always” or “usually” have a revolving balance. Just 12% of consumers not living paycheck to paycheck “always” or “usually” revolve credit.
What that data tells us is that individuals and families that are already strapped and have issues paying the bills are due to have another obligation hit the monthly budget as student loan forbearance comes to an end.
Consumer sentiment reflects some of those pressures. The latest reading from the University of Michigan showed that sentiment declined by 10.3% in May, as measured against April. Not surprisingly, inflation is a notable headwind. Negative sentiment was most marked when it came to buying durable goods and houses. The data is mixed, given the fact that less than a quarter of respondents thought their own personal financial situations are facing a bleaker future.
But it could be the case that suddenly finding the student loans as a new obligation that comes month in and month out — well, cash flow becomes that much harder to manage. And with even less financial “wiggle room” in place, it becomes that much tougher to buy what we need. If and when student loan forbearance comes to an end, there will be a new reckoning about navigating life lived paycheck to paycheck. That’s no easy task in a world where most of us cannot afford a $400 emergency expense and where savings cushions for those of us living paycheck to paycheck have dwindled down to $2,464 from more than $4,000 just a few months ago.
To quote that old song: Something’s gotta give.