Already struggling with soaring rents, recent grads now have a new monthly bill to worry about. They’re living at home, looking for employer help and trying to figure out changing repayment plans.
By Jah’i Selassie, Forbes Staff
Mandatory repayments of federal student loans have been halted since March 2020, when President Donald Trump put in place a moratorium, later extended by Congress and President Joe Biden. That means those who earned an undergraduate degree or left school without one in 2020, 2021 and 2022 have never had to deal with the complexity and financial strain of student loan repayments.
Millennials, Gen Xers and even Baby Boomers owe more total dollars. But this October, when 46 million Americans are supposed to resume paying back the $1.6 trillion they collectively owe on student loans from Uncle Sam, Gen Zers could be in for the most shock and confusion.
They, like other debtors, will have to begin payments in October, while 2023 grads have until December or so, since there’s a six-month grace period after a debtor ends full-time schooling. Those in graduate school can defer payments, but the interest on their grad loans and any unsubsidized undergraduate loans will start accruing once again on September 1, as the three-and-a-half-year moratorium on both payments and interest officially ends. (Yes, the Biden Administration has announced a 12-month “on-ramp period” during which missed or late payments won’t result in collection actions, but that won’t stop the interest meter from ticking.)
The Pew Research Center defines Gen Z as the 68 million folks in the U.S. born between 1997 and 2012 and reports this group is on track to be the most college educated generation ever—and they’re still building up their undergraduate and graduate loan totals, just as the Millennials did before them. According to the College Board, in 2021 54% of new bachelor’s degree recipients graduated with debt averaging $29,100.
Like older student debtors, many of these Gen Zers had been counting on President Biden’s student loan forgiveness proposal—the one the Supreme Court shot down on June 30—that would cancel up to $20,000 of their debt.
“My friends all feel the same way about repaying student loans: angry that even though it has been paused for three years, the loans haven’t been canceled,” says 22-year-old Daphne Ugale, who describes the resumption of payments as “nerve-racking.” She took on $17,000 in student debt becoming a licensed vocational nurse through Xavier College of Nursing and is now living at home with her parents in Stockton, Cal. to save money as she works and awaits acceptance into a registered nurse program at her local community college. “I feel like I’m not doing well in life. My friends have moved out of their parent’s homes,’’ she says.
Ugale’s friends may have moved out, but according to the U.S. Census Bureau, 55% of young adults in the U.S. aged 18 to 24 lived with a parent or parents in 2022 (that includes dependent students away at college). The percentage is down a tad from its Covid pandemic peak, but is likely to remain high as long as rents do. In the broader, 18 to 34 age group, about a third of U.S. young adults still live at home, which is historically high for the U.S., but a lower percentage than in most European nations. Yet Americans are more inclined to think of young adults living at home as a bad thing than a good thing—though half think it doesn’t make any difference, according to a Pew survey.
More than living at home, it’s the resumption of payments that’s stressing out many of the Gen Zers who (just as Mom and Dad likely wanted) pursued higher education. Gen Z’s end-of-moratorium angst is compounded by an understandable lack of knowledge about the constantly evolving repayment options. Some interviewed complained their colleges never gave them a clear picture of what they’d owe—though schools, which can rightly be faulted for encouraging students to take on crippling debt, have also faced an uncertain landscape since 2020.
“When the Supreme Court decision came out, that was something that was devastating, because I know, okay, I’m going to have to pay them back even though I had to take out astronomical loans,” says Cameron Farrar, 23, who has accumulated a total of $29,000 in student debt. He earned his bachelor’s degree in sociology in May 2022 and is now a full-time master’s degree student at the University of North Carolina, Greensboro Campus, even as he works 40 hours a week to pay his rent and other bills.
Farrar says he’s ready to take on whatever debt is needed to ultimately obtain a PhD in sociology (a goal he’s held since high school) but worries about others as payments resume. “So this is going to be catastrophic for a lot of people, some of those who I’m close to and love very much, unfortunately,’’ he says, adding that he knows people whose monthly payments total half their take home wages.
True, a payment equal to half of wages is entirely possible for someone trying to repay all their loans on a standard 10-year federal repayment plan. But the Biden Administration’s new SAVE plan reduces monthly payments to a maximum of 10% of a participant’s income over 225% of the federal poverty line—meaning the first $32,805 of annual income for a single doesn’t get hit at all for repayments. SAVE is replacing the existing REPAYE income-driven repayment (IDR) plan, which only protected income equal to 150% of the federal poverty line, or $21,870 for a single borrower. Older students who were already on the REPAYE program will be automatically switched to SAVE. But others, including all those new graduates, will have to apply for it. (Even those already in REPAYE may want to check their status and update their information.)
The catch, with SAVE and other IDR programs, is that a borrower could have to keep paying for 20 years—or even 25 years, if they have graduate school debt. That’s about as long as most Gen Zers with student debt have been alive. It’s a daunting, but probably unavoidable prospect for many.
“I’m seeing that most Gen Z borrowers don’t have much wiggle room in their budgets after they pay their other living expenses,” says Ryan Galiotto, a financial planner at Fields Financial Services, in Hopwood, Pa. He predicts dragging out payments with IDR is one of three major ways that Gen Zers will cope with their student loan repayments. The other two, he says, are delaying “major life milestones like buying a home, getting married, having children,” and “looking for assistance in repayment whether it be from their parents or their employers.”
That very last part—help from employers—could be about to take off. In fact, it was starting to catch on before the moratorium. In a 2019 survey, the Association of International Certified Professional Accountants found recent graduates ranked student loan repayment third–after health insurance and paid vacation and above a 401(k) match–as a priority when seeking employment. And since the start of the pandemic, the politicians have taken steps to make employer help with student loans even more attractive.
A provision Congress passed as part of Covid relief allows employers to repay up to $5,250 a year of each worker’s student loans, without it counting as income to the employee, through 2025. This is an expansion of a longstanding tax break which allows employers to spend that much on tax free tuition for their workers. While the expansion to debt repayment is temporary, Congress has a habit of extending such popular tax breaks.
As the date to begin payments draws closer, Highway Benefits, a fintech startup that helps employers offer student loan repayment benefits, has seen an uptick in interest. It even offers a free employee toolkit to help workers lobby their bosses for the benefits. “A lot of employees or prospective employees are really getting smart about their benefits and their compensation packages,” says Highway Benefits CEO and cofounder Michael MacLaverty. “We’re trying to empower employees to let them know that in addition to, maybe refinancing your loans, there are other solutions where your company can even help.”
Many larger employers are already on board. When the Employee Benefit Research Institute surveyed 250 companies with at least 500 workers in June and July of 2022, it found 27% were already offering the student loan repayment benefit, another 25% planned to start doing so in 2023 or 2024, and an additional 22% were interested in the benefit, though they didn’t yet have definite plans to offer it.
Problem is, a lot of struggling Gen Zers with student debt don’t have jobs at big companies with cushy benefits. Darius Brockett, 24, graduated from Morgan State University in Baltimore, Md. in 2022 with a bachelor’s degree in multimedia journalism and $28,000 in student debt from three different colleges. After graduation, he even took a job at Party City to stay afloat. Now he’s working in a paid internship in his field, but has yet to find a regular entry-level position.
“In this career field of journalism and production, this is probably the [most] uncertain job you can have unless you have already built yourself up a tenure, and I’m still coming out as a rookie, so anything can happen [financially] depending on how life shakes out,” he says. Brockett cites this uncertainty as the main reason he isn’t holding his breath when it comes to moving out of his parents’ house. When he first heard student loan payments would resume in a few months, he was shocked. “My first initial thoughts were that it was a joke, because it’s not a reality that I want to face just yet. So I laughed it off,” he says. “But then there’s that hesitation of coming to grips with the reality that it’s going to happen. So [I told myself] be prepared, start storing away some money.”
Brockett’s $28,000 in debt for a degree from Morgan State, which was founded back in 1867 as one of the nation’s now more than 100 historically Black colleges and universities (HBCUs), illustrates another reality facing some Gen Zers. According to a report by the Center for Responsible Lending, HBCU students receive less institutional aid from these historically underfunded schools and are more likely to come from low income families. That means they’re also far more likely to need to take out loans, which perpetuates the racial wealth gap.
“There’s already a large socioeconomic disparity between Black graduates and non-black graduates,’’ says Travis A. Richard, director of financial aid at North Carolina Agricultural and Technical State University, a historically-Black college. “I think the Black community, specifically HBCUs, will feel more of the effect [of the end of the student loan moratorium] than students at other schools.” In fact, the Biden Administration’s now-dead debt forgiveness program was designed to reduce some of this disparity by forgiving $20,000 of debt for those who had qualified for Pell grants for low-income students, compared to $10,000 for others whose families were too affluent to receive Pell grants.
Still, some of the biggest undergraduate debt burdens are being racked up by students at colleges with bigger endowments—and higher price tags—than the HBCUs. Morgan State’s undergraduate tuition and fees this coming year will be $8,118 for Maryland residents and $18,798 for out-of-staters. New York University—Tisch School of the Arts is charging $66,388 in tuition (and, of course, living costs are higher in New York too).
Which explains how Alicia Ramos, 22, graduated from Tisch this past May with a bachelor’s degree in theater, a minor in business of entertainment, media and technology and a whopping total student loan debt of nearly $100,000. “I’ve been job searching and applying since March and still have had no luck,” she says. “Which only adds to my anxiety about having to repay my loans, also trying to find affordable housing and budgeting so I can afford to survive and pay rent and try to repay the loans.” As she job hunts, Ramos is back home, living with her mother in Lake Mary, FL, a suburban town north of Orlando.
Meanwhile, other Gen Zers are continuing to build up their educational credentials and debt piles. Thanks to the merit-based scholarships she won, Ohio native Jessica Bentley was able to earn her bachelor’s degree from the University of Alabama in 2021 without taking on any student debt. Since then, she’s accumulated $100,000 in loans as a medical student at St. George’s University in Grenada, West Indies. (U.S. students there can borrow up to the full cost of attendance from Uncle Sam, just as those at U.S. based med schools can.) She plans to return to the U.S. for residency and figures she should eventually earn enough as a pathologist to pay off her debt. But it’s still stressful in the meantime, she says, and even more so now that Biden’s debt cancellation is off and repayments and interest accumulation are about to turn back on. “It feels like we graduated just yesterday, and now you’re thrown into the professional world and everything just comes at you so fast.”
MORE FROM FORBES
Read the full article here