Federal Student Loans Impact Gen Z’s Financial Stability

Earlier this year in July, the Biden administration announced that 43 million Americans’ student loan interest will resume in September and payments will restart in October. A pause on the repayment and zero percent interest rate was put in place from March 13, 2020, until Sept. 1, 2023. This news followed the Supreme Court’s decision to overturn President Joe Biden’s plan to forgive $430 billion of student debt from 37 million borrowers.

Ahead of this restart on payments, many have already admitted to struggling to make ends meet. A new study by The Harris Poll on behalf of Credit Karma found that more than half (53 percent) of federal student loan borrowers said they have issues with paying other bills such as auto loans, mortgages and credit cards.

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Three-quarters of borrowers said that on top of student loans, they are also providing their families with financial support such as food, clothes, rent or other bills.

Notably, McKinsey reported back in April 2020 that the total U.S. student debt accrued is higher than the credit card debt and is growing rapidly. According to recent news from the Federal Reserve Bank of New York, the 2023 credit card debt has reached a record high of $1.03 trillion in the second quarter, up nearly 5 percent from $986 billion in the first quarter.

More than 45 percent of Credit Karma’s survey respondents noted that they already anticipate that they will be “delinquent on their student loan payments once forbearance ends”. And, to that end, 44 percent of people said that the return on investment for higher education in America is not worth the expense.

Nearly 1 in 5 Americans have outstanding federal student loan debt, either for themselves or for their children. Broken down by race, Black Americans are more likely to report outstanding debt (30 percent) as compared to Hispanic Americans (19 percent) and White Americans (15 percent).

In a similar survey by Qualtrics on behalf of Credit Karma, which looked at how generative artificial intelligence is changing personal finance, 43 percent of people polled said they would use generative artificial intelligence to help manage their finances if it would eliminate their money problems. Twenty-seven percent of survey respondents noted that they would use the technology to pay off their debts.

Courtney Alev, consumer financial advocate at Credit Karma, said she wasn’t surprised by the report’s findings. “Many borrowers are making tough financial decisions right now,” she said. “Many Americans are already grappling with several financial struggles given recent inflation and rising costs of living. When you add potentially expensive student loan repayments into the mix, it’s no surprise that many don’t feel prepared to stay on top of their bills.”

Furthermore, Alev notes that the younger Gen Z have recently graduated, with October the first time they will be making payments toward their federal student loans. It will also be the first time that student loans will be a major factor in Gen Z’s monthly budgeting and could give them “sticker shock.”

“Gen Z borrowers may need to start making serious changes to their spending habits in order to balance their payments on time and supporting their lifestyle,” Alev said. “With these payments likely taking a bigger portion of their monthly budget, Gen Z may need to cut back on their leisurely spending. If it comes down to paying for necessities versus paying for the ‘nice-to-have’ things like dining out, traveling and more, hopefully they prioritize paying for necessities first and staying current on their debt payments.”

An earlier report by WWD estimated that the repayments will result in a nearly $40 billion hole in disposable income with the fashion and retail industry most likely feeling the brunt of it. The report noted that the respite in payments was a major reason for the uptick in pandemic spending on apparel and other goods.

Alev believes this loss of discretionary consumer spending will affect “retailers and brands, who may temporarily see less spending from Gen Z.” She advises brands to offer incentives such as discounts or gifts with purchases that will continue to get Gen Z patronage. However, this might not be enough.

“As these student loan payments eat up a portion of their monthly budget, brands and retailers may see Gen Z pull back their spending until they can safely spend on the ‘nice-to-have’ items without going further into debt,” Alev said.

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