Financial Disaster Looms with the End of Student Loan Forbearance and the End of the Child Tax Credit.

By Robert L. Cain, Copyright 2022 Cain Publications, Inc.

PROPERTY NEWS SERVICE

Financial disaster looms reports Susan Tampor in a Dec. 22, 2021 article in the Detroit Free Press. Two senators and  a representative in a Dec. 8 letter to President Joe Biden called it “alarming new information.”  Another senator, Joe Manchin, warned of “a big hole in financial safety.” And the Detroit Free Press in the same article also warned that “families face financial challenges .”

The result could be unpaid rent, wage garnishments, and auto repossessions by late Spring or early summer for the 36 million households that receive the child tax credit.  The double whammy comes from the end of student loan forbearance on May 1 and the loss of the child tax credit.

Here’s how it can end up a serious problem for the US economy.  The total hit could mean $837 a month for those who have both student loans they aren’t paying on now and the end of child tax credit.

Student loan payments average $393 a month. Some pay more and some less, but that’s the average.  Child tax credit means an average extra $444 monthly in the pockets of parents.  Both the student loan forbearance and the child tax credit were put into place as part of the CARES Act.  They both face deadlines with the result that families could end up in the hole every month.

With Student loan repayments with 41 million borrowers resuming May 1 and the child tax credit that ended Dec. 15, their canceling can throw a monkey wrench into the economy.

The bigger hit faces student loans in default.  CNBC reported on Oct. 8 that “because along with their wages and Social Security checks, those who’ve fallen behind on their education loans can have their annual tax refunds seized by the U.S. government. This can cause people to also miss out on the child tax credit and the earned income tax credit since those are usually paid out in tax refunds.” Those total some 9 million, that’s half, of the 18 million student loan borrowers, reports a March 24, 2020, Washington Post article.

Let’s look at how that could affect so many Americans. The Bureau of Labor Statistics reports that the median wages and salaries are $4247 a month. Subtract taxes withheld of an average $2988 per month, and net income lowers to $1267.  Many families have two incomes. That makes a net monthly income for the household of $2534. For the sake of this discussion, I doubled that, figuring it close enough to make the point. Rarely are both spouses earning the same amount with women often earning less.

Now we subtract outlays. Figure average transportation costs of $813 a month per the Bureau of Labor Statistics; that includes car payment, gas, maintenance, and insurance, plus a couple of lesser costs such as public transportation.  

The average student loan payment reports the US Department of Education in $393 a month.  If both adults have student loans, double that to $786. 

Thus we have $2534 less $813 less $786 leaving $1328. They still haven’t paid rent. The median monthly amounts to $1104. That leaves $224 a month for food and to take care of children.  That’s not to mention utilities, eating out, credit card payments. and such “necessities” as the cable bill.

It gets worse. Some $70 billion of back rent owed by 10 million people eagerly waits to result in evictions because tenants simply don’t have the money. Those rents accumulate and add interest making it even more difficult for those receiving the child tax credit and student loans in forbearance when they have to start paying them.

Add back in the average $444 for child tax credit and student loan forbearance and things look better. It bumps up the average income to $1061 a month, enough for food and maybe a dinner out, the electric bill, and clothes for the kids.

Who doesn’t get paid? The biggest expense is usually rent.  Depending on the landlord, paying the rent might be delayed for some time. The expression “understanding landlord” in the Bad Tenants’ Dictionary means one who isn’t too insistent on payment of rent.  An “unreasonable landlord,” meanwhile insists on timely rent payment. Thus, depending on which landlord they have, they can beg off paying rent or look for another bill to put off paying. Maybe the car payment, the Visa bill? No matter what, someone won’t get paid.

Will these dire circumstances all come about? Maybe, maybe not. If student loans get forgiven or forbearance extended again, and Congress passes an extension of the child tax credit, things will stay the way they are now, for a while at least, for families who depend on the child tax credit and owe student loans. Secretary of Education Miguel Cardona stated, “As we prepare for the return to repayment in May, we will continue to provide tools and supports to borrowers so they can enter into the repayment plan that is responsive to their financial situation, such as an income-driven repayment plan.” There’s no way to predict exactly what will happen.  But the result of student loans becoming payable again and of the child tax credit going away can result in numerous evictions, car repossessions, evictions, and employees unable to get to work.  We must prepare ourselves for the possible financial disaster.

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