Editor’s Note: The following is a short excerpt from an article originally published by The James G. Martin Center for Academic Renewal on August 7, 2024. With edits to fit MTC’s style, it is crossposted here with permission.
Legal battles over President Biden’s various schemes to forgive student debt continue. In July, the Eighth Circuit Court of Appeals indefinitely blocked the administration’s ultra-generous new student-loan repayment plan, which could have cost taxpayers $475 billion. Additional loan cancelation initiatives—also certain to face legal challenges—are in the works.
But the high drama of loan cancelation has drawn attention away from a more pressing issue in the student loan system. After the pandemic-induced student loan payment pause ended last year, the Education Department implemented a one-year transition period to allow borrowers time to ease back into the habit of paying their loans. That so-called on-ramp is set to expire at the end of September—yet tens of millions of borrowers have not yet made a payment.
The Looming Student-Loan Nonpayment Crisis
During the payment pause, no federal student loan borrower had to make a payment, and interest rates were set at zero. During the on-ramp, payments are due, and interest accrues once again. But borrowers who don’t pay their loans can avoid the worst consequences of failing to do so: Delinquencies will not appear on their credit records, nor will loans be placed in default or sent to collections.
Since most student borrowers had not made a payment on their loans for over three years, the logic of a one-year on-ramp was to allow borrowers time to make financial arrangements to recommence payment. Missing a payment or two would be no big deal. After a year, the logic ran, most borrowers should be comfortably paying their loans every month.
That ideal couldn’t be farther from reality. At the end of 2019, prior to the payment pause, 3.1 million borrowers were more than 30 days behind on their loan payments. As of March 2024—the latest month for which data are available—the number of delinquent borrowers had reached 7.3 million.
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What is the interest rate on these student loans? 4%?
Credit cards are now over 30%. As there are no penalties for not paying the student loan (other than the 4% interest), it makes economic sense to pay the credit card down instead.
This is sound economic practice.