Will inflation be good for student loan borrowers?

Student loan borrowers take to social media to celebrate inflation.

That’s right, inflation: the bane of alarm bells for consumers all over the world that raises the price of goods and services. Over the past year, prices rose 6.2% – the largest annual increase in three decades, according to October data from the Bureau of Labor Statistics.

Student loan borrowers face a reboot in payments in February after a 22-month hiatus. In the meantime, they praise inflation because, as they claim, it reduces the value of their debt.

“It’s always good to have fixed debt during a time of inflation,” says Jason Delisle, senior researcher at the Center on Education Data and Policy at the Urban Institute, a nonprofit research organization.

This makes sense: since student loans have a fixed interest rate, which means the rate is not sensitive to market fluctuations like variable rate loans are, its value decreases as rising inflation devalues ​​the dollar. The result is that loans borrowed in the past are worth less when you pay them back in the present.

Kathryn Anne Edwards, economist at RAND Corporation, a global nonprofit public policy think tank, says, “In theory, you can inflate debt; it is something that we do not recommend. She says borrowers might want to limit their expectations about the potentially positive effect of inflation. The value of your debt can technically be lower, but it won’t matter if your paycheck doesn’t keep up with inflation, and your other household expenses are also growing faster than your paycheck.

The impact of inflation on debt only benefits you if your salary increases

The value of your fixed rate debt only goes down if your wages also increase at a rate comparable to inflation.

As inflation continues to climb, it is unclear whether wages will rise across the board. It is possible that labor shortages and widespread employee demands for higher wages will force employers to raise wages, but that depends entirely on the industry or sector, experts say.

And if the rate of inflation exceeds the rate of wages, your ability to pay for goods and services – the purchasing power of consumers – decreases, as does your ability to repay your debts.

However, you might be more immune to some rising costs than some groups. For example, increases in health spending hit older people harder than others, and child care costs hit those with young children as opposed to those with older children.

It is not known whether or not wages will follow inflation. But the long-term effects of that might not happen quickly, says Constantine Yannelis, assistant professor of finance at the Booth School of Business at the University of Chicago.

What we’ve seen so far is this: Actual average hourly earnings for all employees declined 1.24% from October 2020 to October 2021, according to November 10, 2021 data from the Bureau of Labor Statistics.

Salary increases could also increase your loan payments

Suppose your salary increases with inflation and your loan payment stays the same. You might benefit from inflation in that your loan will be cheaper since its amount doesn’t change, but your income has.

However, if you are enrolled in an income-based repayment plan, you must recertify your income in order to stay on that plan. Income-based repayment is beneficial for borrowers whose loan repayments exceed what they can afford. These plans set the payments to a portion of your discretionary income and extend the repayment.

This means that if your income increases in response to inflation or other reasons and you are enrolled in an income oriented plan, your monthly payment amount will also increase. There is one advantage, however, that the higher your loan repayment, the faster you pay off your debt and the more you will save on interest.

“It’s not necessarily a bad thing, but borrower perception matters a lot here and there can be a bit of a backlash when people see their payments go up because their income has gone up,” Delisle explains.

Yannelis says that inflation might affect your payment under an income-based plan in a different way. If the federal poverty guidelines change in response to inflation, the amounts used to calculate discretionary income could also change.

All borrowers should get student loans back into their budget

Almost 43 million people will have had 22 months without federal student debt payments in their budgets by February 2022. Much can change during this time.

The payment break was intended to give borrowers leeway to focus on other financial needs. For some borrowers, this meant paying rent and food. For others, it meant paying off their student loan principal, buying a house or car, finding better quality care for their children or seniors, investing or inflating a retirement account.

And according to data from the Federal Reserve Bank of St. Louis, many Americans have been able to save since the start of the pandemic thanks – in part – to a combination of the payment break, the expanded child tax credit, extended unemployment insurance and stimulus checks.

Borrowers on financial amortization won’t feel the repayment spur or the impact of inflation on the costs of goods and services as quickly as others, experts say. But those who still don’t have a job or were in default before the pandemic might have a harder time making the transition.

What all borrowers can do before the payment is restarted is to contact their agents to find out about their options, which may include:

  • Adhere to an income-based repayment plan, which would reduce your monthly payment to $ 0 if you are unemployed.

  • Submit an application for deferment of unemployment if you are out of work but don’t expect to stay so for long and don’t want to commit to an income-oriented plan.

  • Request for abstention from subjection for a short-term ordeal unrelated to unemployment.

If you choose to take an extra break through deferral or forbearance, interest will continue to accumulate and will be added to your principal each time you start repaying.

Anna Helhoski writes for NerdWallet. Email: [email protected] Twitter: @AnnaHelhoski.

The article Will inflation be good for student loan borrowers? originally appeared on NerdWallet.


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Julio V. Miller