When Congress voted in May to restart student loan payments this fall — and then the Supreme Court overturned President Biden’s student loan forgiveness plan in June — Alexa Goins and her husband realized they had a choice: They could keep their house or they could pay off their student debt. 

Together, she and her husband owe $41,000 in student loans — she had borrowed for her undergraduate education, and he borrowed for another program. He is currently between jobs, looking to break into the tech industry, so they’re living off Goins’s $80,000 per year salary as a senior writer at an ad agency. “We’re kind of living paycheck to paycheck right now,” said Goins, now 29.

Her husband bought the Indianapolis house they live in before their marriage, and they were thinking of leaving the city in a year or two anyway. But it was the impending resumption of payments and the demise of Biden’s program — which would have canceled up to $20,000 in debt for an estimated 16 million borrowers, including Goins — that made up their minds. “Just knowing that we’re going to have an extra burden … we just decided, now’s the time to sell so that we can finally have no debt,” she said. Renting, debt-free, feels like a safer bet right now.

In October, student loan borrowers like Goins and her husband will be on the hook for payments for the first time since 2020. When the pandemic hit, the Department of Education automatically paused student loan payments for all borrowers and suspended interest. The policy got extended, and then extended again, so that for three years, borrowers were allowed to skip payments and avoid defaults, without seeing their balances grow. The pause had a major impact: Student loan debt is the second-biggest consumer debt category after mortgages, with the total amount of debt now approaching $1.8 trillion. Not having to make payments kept borrowers — and the overall economy — afloat in what could have otherwise been a dramatic recession during the COVID-19 pandemic, allowing them to avoid catastrophe if the pandemic put them out of work or spend their money in other ways. 

Now that respite is about to end. And it’s coming at a precarious time for the American economy. It’s not all bad news: Forecasters have just started to brighten their gloomy predictions about an impending recession and some borrowers used the pandemic to pay down debt, leaving them in a stronger financial position. The Biden administration has introduced a new program that will discharge the loans of more than 800,000 borrowers who were on income-driven repayment plans and reduce the monthly payments of many who still owe. But tens of millions of people will have another bill to pay, and they’re not all coming out of the pandemic better off. The average student debt payment is significant — hundreds of dollars per month, according to The Federal Reserve Bank of New York. And some people are in more debt than ever before, and are still paying more for everyday goods — including food and rent — than they were before the pandemic. That could add new strains to family budgets and force some borrowers, like Goins, to make big financial sacrifices or risk defaulting.

“The repayment pause has really been such a reprieve for borrowers, and that has ripple effects throughout the economy,” said Laura Beamer, the lead researcher of higher education finance at the nonpartisan, left-leaning Jain Family Institute. “What we’re worried about when the payment pause ends is that we go back to this pre-COVID trend of ever-increasing balances, not being able to make ends meet, going back to the status quo of lower homeownership rates, and higher delinquency and default rates.” 

Some borrowers used the pandemic to save, pay off debt

For some borrowers, the three-year payment pause was exactly what they needed to get their student loan debt under control. One was Kevin Taylor, 46, who lives in central Michigan. He first earned an associate degree in 2000, and worked a series of odd jobs until he was laid off from a steel firm, where he was helping to run the website, during the Great Recession. Hoping to enter a more stable career track, he went back to school to earn a bachelor’s degree in information systems and graduated in 2012. By the time he was done, he’d borrowed $48,000 in student loans.

Like many borrowers, he struggled to make payments on his loans in the beginning of his career, when his salary was low. He chose a graduated repayment plan, which meant he wasn’t paying enough to keep up with interest and his balance grew. But the pandemic hit at a moment when he was doing better financially, and he decided to keep sending in money even while repayments were paused. Because no interest was charged during that time, all of his payments were applied toward the principal, which meant he was actually digging himself out of debt. “I finally actually saw my balance go down for the first time in my life,” he said.

Student debt has been a ballooning problem for a while. In the 10 years before the pandemic, the total amount of student debt had more than doubled. About half of students who enrolled in a degree program after high school took out student loans. (That number dropped in recent years, to 38 percent in the 2020-2021 academic year, the first full year of the pandemic.) By 2019, it was clear that many borrowers were in trouble: Nearly one in five were behind on payments. The average payment for borrowers is around $300 a month, ranking just below the monthly payment for a car in many households, but some (like Taylor, who will owe $550 a month) pay much more. The debt these borrowers carry makes it harder for them to invest in other things. Student debt accounted for about 20 percent of the decline in homeownership among younger adults, according to a 2019 report from the Federal Reserve, and borrowers contribute an average of 6 percent less to savings for retirement than people without student loan debt, according to a report from Fidelity Investments.  

The student loan repayment pause wasn’t designed to directly address any of these issues. Instead, it was an emergency measure implemented by the Trump administration to stabilize the economy during the early stages of the COVID-19 pandemic, when unemployment spiked to nearly 15 percent. But it ended up being a kind of experiment: What happens if borrowers suddenly have more money to spend every month?

The government paused payments for four kinds of consumer debt: mortgage, student loan, auto and credit card debt. To take advantage of the pause, most borrowers had to ask their lenders for it if they needed it, said Erica Jiang, an economist at the University of Southern California Marshall School of Business. By contrast, student loan debt forbearance was automatic, and the government took the unusual step of setting the interest rate to zero on those loans so that borrowers’ balances wouldn’t grow. 

Jiang said policymakers wanted to avoid a repeat of the 2008 housing market crash and the Great Recession by instituting the temporary forbearance policy. It worked. “If we compare this crisis with the financial crisis, in ‘08 and ‘09, during that period, we saw a huge spike in delinquency and foreclosures,” Jiang said. That led to a cascade of negative effects for neighborhoods and the economy as a whole. “And [during the pandemic], we didn’t see that at all,” she said. A National Bureau of Economic Research paper by Michael Dinerstein, Constantine Yannelis and Ching-Tse Chen, economists from the University of Chicago, found that temporarily allowing people to stop paying off their loans helped the post-COVID recovery gain steam.

But there were also limits to how much the pause could help individual borrowers, because it wasn’t designed to outlast the pandemic. And while the pandemic was good for some people financially — wages grew for low- and middle-income earners at historically high rates — it created some serious headwinds for others. Inflation peaked at 9.1 percent last summer, and remains nearly 3 percent this year.

All of this means that the end of the pause could lead to belt-tightening for borrowers, even if they did pay off some of their debt. That’s the situation Taylor finds himself in. He’s on track to be debt-free in three years, but in the short term that will come with a cost: On a monthly basis he and his family will have $550 less to spend. And so even though Taylor and his family feel like they did the right thing — prioritizing paying off his loans — they’re about to start trimming their spending. “I’m cutting back on streaming services, I’m cutting back on how often we go out,” he said. “We’re not going to have the full-on vacation; we did a mini vacation,” he said. “All the money I’ve been spending on fun things, it’s not going to happen anymore.” 

Inflation, other debts may leave some borrowers worse off

For borrowers in a better financial position than they were before the pandemic, belt-tightening might be the worst that happens. But some households may find themselves worse off as payments restart. Not all student loan borrowers chose to save the extra money in their budget, or use it to pay down loans. The total amount of student debt didn’t go down much, and an analysis from the Federal Reserve Bank of New York in 2022 found that only 18 percent of federal loan holders made payments and reduced their debt. Dinerstein and his colleagues found that in the first year of the pandemic, the average borrower subject to the pause owed $1,800 more in debt, paying an additional $20 a month, compared to before the pause. 

As student loan repayments resume, that added debt could turn into a serious burden. Quinn Higgs, 42, and her husband are among those who bought a home. Their mortgage is $1,000 more than their prior rent payment. Moreover, Higgs estimated that they’ve been spending as much as $1,300 each month on groceries for their family of three, about $400 more than they were spending before pandemic-recovery inflation raised prices. She owes more than $56,000 on student loans, and she and her husband will together pay more than $600 a month when payments resume.

To bridge the gap, Higgs, who has been a stay-at-home mom, is looking for a job. Any extra income she’s able to bring in will mostly go toward student loan payments and child care, she says. She’s looking for jobs in administrative support, and her expected salary won’t be enough to make her family comfortable. But without it, they could barely make their payments. “We have theoretically enough right now to squeak it out if we decrease our grocery budget a bit, but that’s with zero spending outside of that,” she said.

There’s an argument that even though they’re struggling to make ends meet now, Higgs’s family’s decision to buy a home was a good thing in the long term. Millennials are buying homes at older ages than previous generations and struggling more to afford them, which is a problem because home ownership is a key avenue to building wealth. “More debt also might reflect investment, or people making purchases that are very valuable to them in a way that puts them in a better situation,” Dinerstein said.

But those investments are only valuable if borrowers can keep up with the payments. And there’s a very real risk that won’t happen. “I’m very concerned that a lot of individuals just aren’t going to be able to meet those payments,” Yannelis said. That means borrowers could default not just on student loans, but on the mortgages and car loans they took out while they had more cash. 

According to other recent research, borrowers who were in distress before the pandemic may be especially vulnerable now. Those with student loan delinquencies during the two years before the pandemic used the pause to increase credit card debt and auto loan debt, according to a preprint published this May. Distressed borrowers whose loans were paused had 12.3 percent more credit card debt than those whose loans weren’t paused, and auto loans rose 4.6 percent. When forbearance is lifted, those households may find themselves in more financial trouble than they were before. Meanwhile, according to a Consumer Financial Protection Bureau analysis from June, as many as 20 percent of borrowers have risk factors — like previous student loan delinquencies and new non-student debt delinquencies during the pandemic — that could make them struggle once payments resume. The CFPB also found that 8 percent of student loan borrowers have already fallen behind on other debts, thanks in part to higher interest rates on other kinds of loans.

Those struggles don’t matter just on an individual level — they could ripple out to the country as a whole. Defaults could lower credit scores, deflate markets, and help slow the economy. Short of that, millions of borrowers may just find that they have less to spend, dragging down the consumer spending that’s helped keep the economy afloat — just as the U.S. was hoping to avoid a recession. “If people get stretched thin enough, they may just not be able to pay back the debt on time. And so they might become delinquent, and that could hurt credit scores [and] … cause more financial distress,” Dinerstein said. 

Beyond that, the fundamental problems with the student loan system remain. The Biden administration has promised a number of changes to the program to help ease borrowers back into repayment. In addition to discharging some loans and lowering monthly payments, the administration says late payments will not be reported to credit bureaus for the first 12 months of repayment, and borrowers who fall behind won’t be considered in default or be sent to collections. Unpaid interest will also no longer be added to balances, so borrowers who make monthly payments won’t see the amount they owe grow over time. 

But that — like the student loan pause itself — won’t fundamentally alter the fact that Americans are borrowing trillions for their education, some without hope of paying it back. “People are taking out so much debt under the assumption that they’re going to have an earning premium afterwards, that will justify all the debt they’ve taken out,” Beamer, of the Jain Family Institute, said. “And that’s just simply not panning out to be true across millions of people, and that is what’s creating this unprecedented student loan bubble.”