The frost thaws, then comes the deluge. For the paycheck-to-paycheck economy, the tide of debt securities can be difficult to navigate.
The Federal Reserve said in a Remark last week that about 60% of borrowers with student loan debt made no payments on their student loans from August 2020 to December 2021.
In total, these same borrowers hold $400 billion in outstanding student loans, and they would have been paying about $2.8 billion a month if not for the forbearance programs that have been a critical part of the pandemic.
Those programs are set to expire in August, and apparently those payments are set to resume.
But as the Fed noted in its paper, “some of these borrowers may not be ready to resume payments once the forbearance expires.” As many as 11.5 million of those borrowers may, in fact, not be able to meet the resumed repayment schedules. Meanwhile, overall credit card debt and auto loan debt have increased, as have default rates on these debt securities.
These trends may bode ill for student loans, but it should be noted that triangulation of Fed data with PYMNTS research shows that relatively low-income consumers may be the hardest hit.
Nothing is left
More than 60% of the US economy lives paycheck to paycheck, meaning consumers have nothing left after take home pay is paid to meet monthly obligations.
As PYMNTS has noted in recent weeks, paycheck-to-paycheck consumers are more inclined to take on debt. Specifically, they are three times more likely to rollover credit card debt and have higher monthly balances overall. Among cardholders who live paycheck to paycheck, 34% of those who have no problem paying their monthly bills and 47% of those who have trouble paying their bills “always” or “usually” have a revolving balance. Only 12% of consumers who don’t live paycheck to paycheque “always” or “usually” use credit.
Read more: Paycheck-to-paycheck consumers are 3 times more likely to incur credit card debt
What this data tells us is that individuals and families who are already strapped for money and having trouble paying bills must have another obligation that affects the monthly budget as the forbearance of student loans are coming to an end.
Consumer confidence reflects some of these pressures. The latest reading from the University of Michigan showed sentiment fell 10.3% in May, compared to April. Unsurprisingly, inflation is a notable headwind. Negative sentiment was strongest when it came to buying durable goods and homes. The data is mixed, as less than a quarter of respondents believe their own personal financial situation faces a bleaker future.
But it could be that the sudden discovery of student loans as a new obligation that arises month after month – well, cash flow becomes all the more difficult to manage. And with even less financial “wiggle room” in place, it becomes all the more difficult to buy what we need. If and when student loan forbearance ends, there will be a recalculation on the navigation of life lived from paycheck to paycheck. That’s no easy task in a world where most of us can’t afford a $400 emergency expense and where the savings cushions for those of us who live off a check pay to pay fell to $2,464 from over $4,000 just a few months ago.
See more : Savings cushion shrinks for low-income paycheck-to-paycheck economy
To quote that old song: Something’s gotta give.