“Let no debt remain outstanding, except the continuing debt to love one another, for whoever loves others has fulfilled the law.” – Romans 13:8
The student loan payment pause will expire this October and many people are speculating that this will cause another recession.
43 million people owe student loans, and the average monthly payment is about $300. For the last three years, people in their 20’s have been putting that money back into the economy instead of paying off their student loans. Now the time has come, and the debts need to be paid.
So now that 43 million Americans will have hundreds of dollars less to spend, many are worried about another recession.
There are three reasons why I don’t think student loan repayments will cause a huge issue in our economy:
- There is an “on ramp” for starting payments again (as long as you communicate with your borrower).
- The SAVE program ties a minimum payment to discretionary earnings.
- People are returning to work and working more hours.
I believe that paying back your debts builds character. If you owe student loans, now is a great time to put in the work and prove to yourself that you can pay it back.
Transcript:
Hey, this is Darryl Lyons CEO and co-founder of PAX Financial Group. Thanks for tuning in to Retire in Texas. And again, this information is general in nature only. It’s not intended to provide specific investment, tax, or legal advice. Visit PAXFinancialGroup.com for more information. And again, if you are interested in meeting with one of our advisors, it’s a 15-minute consult.
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So, thanks for tuning in today. Today, I’m going to talk about student loans. You may not have a student loan student loan payment but stay tuned because there’s a there’s kind of a tsunami wave coming our way with a whole group of Americans that are going to have to start paying student loans. And I want to double click on that to find out if that’s going to put us in a recession.
So that’s what we’re going to talk about today. I’m going to set the stage on this whole student loan issue in a concise amount of time. And then hopefully your takeaway is, hey, okay, I see what’s coming and I see it as a threat, or I don’t. So, let’s you know, let’s kind of go into the background again.
Biden in his campaign said he is going to wipe out student loans and there are absolutely some people that that believe that that he broke his promise and they’re frustrated because the Supreme Court ruled that that’s not within his purview. It was a 6-3 ruling. He was overstepping his authority. And so, a lot of people have been kind of waiting, hoping that their student loans would be wiped out and the government was going to write a check.
It’s about 43 million people. So, it comes out to one out of eight people have student loans that they were expecting to go away. Now, for the past three years, they haven’t been making payments on their student loans because there is this moratorium as a result of COVID. So, for three years, basically people have not been paying on their student loans and then they’ve been just kind of waiting, just waiting for Biden to wipe it out.
And so, what do they do now? I mean, now all of a sudden, so come October of 2023, they’re going to have to start paying on their student loans. And so, a lot of people are looking at this. A lot of economists are saying, hey, I know the market’s doing really well, but we’ve got 43 million people that are going to have to start paying on student loans in October, and it’s going to be this big sucking sound of money coming out of our economic system because the average payment I’ve seen different studies, but it’s, you know, 275 to $400 a month.
Let’s just say $300 a month. So, you can do the math. You can pencil this out and say, okay, this amount of money is no longer going to be in our financial system because it’s going to be redirected back to student loan payments. And, you know, there’s the low hanging fruit of those organizations and companies that are hyper focused on this.
You can imagine like a GameStop where their demographic profile might be in the early to late twenties, and they’re going to say, well, man, you know, we’re not going to get that cash flow coming in because they’re going to have to pay their student loans. There’s a lot of organizations out there, the businesses that are really hyper focused on this issue because they know it’s going to impact them.
And the economists are saying there’s this tsunami of money that’s going to be exiting the system, so to speak, and it’s going to be going back to the student loan payments. And there’s some people that make the case that that’s going to put us into a recession. And so, I’ll give you my opinion in just a minute.
But let me continue to set the stage on this student loan issue. And I also, if you don’t mind taking this exit ramp real quick, I can empathize with the people that have student loans. I went to Saint Mary’s University. I had no clue what I was doing. First generation college graduate, actually, college participant. And I get there, and I go to the bursar’s office.
Not even a clue what a bursar is. I actually still don’t know what a bursar is, but I go to the bursar’s office every single year and I would just ask them, what do I need to do to get this school paid for? Nothing mattered to me but being a graduate of Saint Mary’s University. And so, they would hand me my student aid form and all I would look at was what I would have to pay out of my pocket for this next year. And I’d say, I can pay that if it was $4,000, I was like, okay, I’ll go. I’ll go work somewhere and I can pay that. I never looked at the numbers above the line that said, part of your subsidy is yes, scholarships and yes, Pell Grants and all that stuff, but a chunk of it was student loans.
I honestly I mean, you’re talking to a kid who is just trying to fight his way to get a degree. I didn’t care about what was above that line. I didn’t think about the student loans. And so, I empathize with an ignorant group of people out there that don’t think about that because I was one of them and just not knowing how to navigate this system.
I’m not saying ignorance is an excuse, I’m just saying I can empathize because I did the same thing. I just signed at the bottom and said, okay, I can afford that bottom line number. And so, every year they were giving me student loans at St Mary’s and they were just piling up. And then I graduate, and I had I think it was about 35,000 of student loans, and I was like, man, okay.
And, you know when you read the scripture, there’s one scripture. I don’t know exactly where it’s at. It says, let no debt remain unpaid except the continuous debt to love one another. I love that scripture. There’s a little bit more to it. I don’t have it off the top of my head, but let no debt remain unpaid.
But the continuous debt to love one another. Really beautiful framing scripture with some financial advice and life advice. Something in my spirit, probably the way I was raised, said I’ve got 35,000 in debt. For me, I felt a moral responsibility to pay off what was borrowed. And so, I took it upon myself to knock it out, to pay it off as much as I could.
And I had to do forbearance sometimes because of my income, sometimes I didn’t have income because I was hustling, trying to get work. And so, I’d have to call them up and ask for something called forbearance. So, they would give me a break for a few months, and I wouldn’t have to make payments. And so, I have to play that game a lot.
But eventually I got it all paid off, all 35,000, and it felt really good. And I think there’s some I think there’s a lesson there because there’s something that’s inherently good about paying off a debt versus somebody just wiping it out and so I don’t want to discount that character building opportunity of grinding. If you steal that from somebody, you steal a part of their who they are.
So, I really think there’s still some merit in letting people grind out their debts and pay it off from ignorance or not. I still think there’s merit and I’m not going to steal that from people. That’s a part of my you know; I don’t have much of a victim mentality in me. I just want to give people an opportunity to grind, wake up at the end of the grind and say, I did it, and that makes you the person that you are.
So, as I say that that’s my background, so you know where I’m coming from. But at the same time, there’s this group of people, 43 million people that are disappointed with Biden. And this is not political, but they expected this and now they’ve got to start paying this bill that’s going to come due 400 bucks a month.
What are they going to do? And that happens in October of 2023. So, the market thinks that this is going to tip us into recession, but it probably won’t. And here’s why. Well, first of all, let me tell you some of the things that before why I think it’s not going to, I keep teasing that out. But what happens is to put it in context, you’ve spent the last three years, you haven’t had to worry about payments.
You’ve been hoping Biden would take care of it. You bought a new car, right? There’s numbers that support this. You’ve gone on vacation with a credit card. You got an apartment. And so, a lot of these groups, this group of people maybe even started a family, they’ve extended themselves to the max already. So, there’s a large group of people we know in America right now that that the majority of Americans did that does not have $400 in their savings account.
I mean, you just that’s just how we operate. You’re living on the edge. And so right now, this group of people I’m generalizing here that $400 is going to break them. But here’s why I don’t think it’s going to break our economy. One, there is an on ramp to this to the to the payback. So, there’s if you missed payments, it’s for one year, just one year.
You get this like one year kind of, hey, we’re going to take it easy on you. They’re not saying don’t communicate with us. You’ve got to log onto your site. Many of these people are like, I don’t know how to log in. I don’t even know who my service provider is. So, student loan borrowers, you got to be an adult.
You got to go in there and you got to log in and you’ve got to engage with your lender and you can say, Hey, I’m going to miss some payments and it’s not going to go against your credit and they’re not going to go send it to collections that you have a one year moratorium with. That’s not going to happen.
So that’s why I think that initially it’s not going to be a shot because there’s going to be a kind of an on ramp. And then in I believe it’s July 20, 24, there’s something called a SAVE program. It’s an acronym for something, something about education being valuable. But that SAVE program starts in 2024. And that has a what I think is a pretty cool mechanism that says if you’re, well, basically ties your payment to your income.
And so, if your income’s low, your payments are going to be low and there’s formulas for that and it comes out to about 5%. So, in those situations, the people that used to have to pay 400, if they have low income, they’re not going to have to pay that 400, which is a by the way, it’s a big chunk of this group of people.
And then finally, I also want to say this. The other reason I don’t think first of all, the on ramp is going to help ease this transition. The SAVE program after 12 months is going to ease this transition. And then finally, I think people are going to get back to work and we’re already seeing it now. I just heard recently that the women’s labor participation rate is at an all-time high.
I think people are going to they’re done rioting and they’re done playing video games and they see that food is going up and everything else is going up and student loans are coming back. I think they’re going to go back to work. I am generalizing here and I’m playing tongue in cheek here, but I’m also I have conviction that work is generally good.
I could even go theologically and suggest that work could even be a part of heaven, because I think that work builds you and builds the character of a person. So having these people kind of being forced in a roundabout way to go back to work, I think is going to be a big movement that we’re going to see.
And I’ve talked to several employers just recently, and they’re just surprised that workers are finally fighting over who gets the hours in the schedules. And that hasn’t happened in years. And why? Well, because the prices are going up and student loans are coming back. So, the workforce may get much more efficient. And that’s just good for our entire country.
So, for those reasons, a lot of the people say recession is coming, maybe, but based on the student loans, the 43 million people that are going to pay about 3 or $400 a month, you may see that headline. But don’t forget, there’s this one year on ramp. Then they have this SAVE program that ties the minimum payment to discretionary earnings.
And finally, I think we’re going to see people go back to work. So not really worried about it that much. I think it’s a there’s bigger issues here. I mean, we have stupid, stupid courses at universities, like there’s this Fashion Institute of Technology that has a course called pattern making for dog garments. So that’s of course, I’m in, I don’t know, $2,000 that you’re going to pay for course, to learn how to do pattern making for dog garments.
UTSA even has a Beyonce course. It’s probably more than that. There’s actually at the University of Southern California a selfie class like we’ve got to start waking up and say, hey, 2000, 3000 for these courses. It just doesn’t make sense. And, you know, there’s just some degrees that you just don’t go to private school for. Like really you probably shouldn’t.
If you’re going be a teacher, you probably shouldn’t go to private school unless you’ve got a lot of subsidies and scholarships, because the math doesn’t work. So, we have to start getting a bit better and put pressure on the universities, which they are feeling it. I have talked with some of the professors. They are feeling it at some of the major universities now because people are actually taking inventory of what they’re paying for.
And I think there’s alternatives out there, specifically online. So hopefully the marketplace in general starts to reset and we don’t have this issue on a go-forward basis, but we do have to pay and resolve what we had, the system that we had in the past. But I think got to go for basics. It might be interesting.
For example, I, I, you guys may know, but it was during COVID. I went back to school online at Texas A&M Law School and got my master’s in financial services. And I did that all online. I think there’s just going to be different alternatives for a lot of people on a go forward basis, and we may not have to deal with this kind of out of sync economic system in higher education going forward.
Hopefully, we’ve got to get rid of waste and put more pressure on the universities. So, but with all that being said, that’s the status of the student loan world right now. Certainly you can look up the SAVE program S-A-V-E if you are a student loan holder and check it out and learn more and then just grind it out, pay it back and give yourself a big pat on the back or a steak dinner or celebrate when you’re done, but you will knock it out.
You just got to go back to work and focus in on it. And for those that are worried about the recession, because this I just think this is not going to be as big of a factor as some people are saying. So, thanks for tuning into Retire in Texas today. I hope this was helpful. And as always, I want to remind you that you think different when you think long term. Have a great day.
Resources:
https://www2.ed.gov/policy/highered/reg/hearulemaking/2021/idrfactsheetfinal.pdf
https://www.axios.com/2023/07/10/student-loan-payments
https://www.fitbux.com/articles/paye-vs-repaye/
https://www.texastribune.org/2023/07/05/income-driven-repayment-plan-student-debt/
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