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The Student Loan Crisis Is Worse than You Think

Written by:
Director of Education and Corporate Communications

Payments resume in October, but Consolidated Credit warns: “Student loans are part of a bigger problem.”

In a few days, 44 million Americans are going to have to start paying back their student loans. For the past three years, monthly student loan payments were suspended due to the pandemic. The federal government declared those payments must resume in October. 

For many of those student loan borrowers, research shows that they spent the money on consumer goods rather than saving the money.

The MassMutual Spending & Saving index reported this month, “Over a third with student loan debt used funds earmarked to pay down their debt to purchase consumer goods during the pause in federal student loan payments.”  In other words, instead of saving the money that they would have paid toward their student loan debt, they bought “non-essential” items. That same study shows “74% with student loan debt are planning to cut back on their spending when student loan payments resume.”

 “The domino effect of debt”

One problem that the economy will face is that the Americans who owe on their federal and private student loans will affect those who owe nothing. What does that mean?

First and foremost, the immediate family of student loan borrowers will be affected. Many borrowers are married with children, and those who plan to ‘cut back on essentials’ when they resume student loan payments will have to make tough choices about their family spending. 

Another issue is the simple fact that many student loan borrowers will struggle to resume payments because they owe money on other debts.

In the two decades at Consolidated Credit, I’ve seen what we call the domino effect of debt. Very seldom do people suffer from only one source of debt. For example, they might have an auto loan and a mortgage, so to make ends meet, they start living off their credit cards.

Those credit cards quickly become the most expensive source of debt, since interest rates today are well over 20%, while the average mortgage and auto loan rates are between 8% and 9%. Student loans average between 5.5% and just over 8%.

You can see why Consolidated Credit focuses on credit card debt. Once you rely on your credit cards to make ends meet, you can quickly rack up an overwhelming amount of debt that is tough to pay off.

Next, national implications come into play.  An independent economic advisory firm called Oxford Economics says student loan problems could cause consumer spending to plummet “by as much as $9 billion each month.” That means fewer goods and services being bought, which means fewer merchants and employees who are working.

The solution starts with a “C”

Because all debt is connected, the easiest way to begin to ease the shock of student loan repayments is to help those borrowers get a handle on their credit card debt. If we can eliminate their highest-interest debt, they can get rid of those 20% interest rates and funnel the savings into their 5-8% student loans.

In addition, by working with a nonprofit credit counseling agency like Consolidated Credit, they’ll learn how to budget and save even more. You can wrangle your credit card debt by getting a free debt analysis from a certified credit counselor, then use your savings and newfound knowledge to keep student loan payments from dragging you down. 

It sounds odd to people when I first tell them this, but when they tell me how worried they are about their student loans, I reply by asking how much they’re carrying on their credit cards. Now you know: All debt is related. It’s all part of the same problem. Thankfully, Consolidated Credit is the singular solution.

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