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Student Loans, Child Tax Credit Unknowns Could Shock Budgets In 2022

Susan Tompor Detroit Free Press

WWR Article Summary (tl;dr) As Susan Tompor reports, "The new year could prove to be painful on the wallet for many consumers, particularly some college graduates and young families."

Detroit

Budget shocks could add up to shortfalls of several hundred dollars a month in 2022 for some, as monthly student loan bills are set to resume in now in May, the prices for food and other items remain high and the future of the child tax credit looks extremely dim.

Many people could be making tough choices on what bills to pay, and possibly looking for ways to work extra hours or find higher paying jobs to deal with essential bills, such as rent, the mortgage, car payments, and, yes, student loans.

Here's a look at what to expect ahead:

Student loan debt could get thrown back on the pile of bills

Millions of borrowers had faced a looming Feb. 1 date for when they'd have to restart making payments on federal student loan debt.

On Dec. 22, though, the U.S. Department of Education announced a 90-day extension of the pause on student loan repayment, interest, and collections.

Those payments will need to resume May 1 now, based on the new extension.

The pause on student loan payments will help 41 million borrowers save $5 billion per month, according to the U.S. Department of Education.

"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," according to a statement by U.S. Secretary of Education Miguel Cardona.

After the Build Back Better negotiations hit a major roadblock earlier in December, we began to hear more bantering about the possibility of another extension. The fear of the potential impact of the omicron variant on the economy also is coming into play here.

The student debt payment pause, which began in March 2020, has been repeatedly extended. The last extension, announced in August, was set to run through Jan. 31and dubbed as the "final" extension. Once the moratorium ends, those federal student loans on pause would once again accrue interest.

As part of financial relief offered during the COVID-19 emergency, a pause was put in place on the repayment of student loans. Borrowers benefited from a temporary 0% student loan interest rate and a pause on collections for borrowers with federal student loans held by the Department of Education.

The economy has improved significantly since the economic collapse in the spring of 2020. The U.S. unemployment rate declined dramatically, landing at 4.2% in November. An argument can be made that it's time for student loan payments to begin once again. Now, though, there is more concern about how the jobs picture and the economy will be hurt by the spread of the omicron variant.

"Unemployment rates for college graduates have normalized," said Mark Kantrowitz, a student loan expert and author of "How to Appeal for More College Financial Aid."

Delinquency rates, he said, are better than they were before the pandemic. Among those who didn't qualify for the payment pause and interest waiver, forbearance rates have returned to norms before the pandemic.

"If a borrower has a job, they should use the additional savings to build or bulk up their emergency fund or pay down higher interest debt," Kantrowitz said.

Student debt activists and some progressive Democrats strongly pushed back on the Feb. 1 date, arguing that the student debt crisis could drag down the economic recovery.

An analysis by the Roosevelt Institute indicated that more than $85 billion would leave the economy once payments resumed, according to a Dec. 8 letter sent by two Democrats, Sen. Elizabeth Warren of Massachusetts and Senate Majority Leader Charles Schumer of New York, to President Joe Biden.

Student loan borrowers paid an average of $393 a month toward their student loans before the payment pause, according to the letter — money that could not be used for other needs in the family.

About 18 million borrowers will have gone nearly two years without having to make a student loan payment, according to the letter.

The letter noted that about $7 billion a month will go toward student loan payments if payments resume. The letter urged Biden to extend the pause on student loan payments and act to cancel student debt.

While student borrowers can breathe a bit easier now, Kantrowitz said it will be important in the months ahead to prepare and make sure that payments can resume smoothly.

They include: —Updating your contact information with the loan servicer, so you don't miss critical pieces of information, such as your new payment due date and loan payment amounts.

—Updating your contact information at StudentAid.gov.

—If you are using AutoPay to automatically transfer payments from your bank account to the loan servicer, you will probably need to reaffirm that your bank account information has not changed.

—If you aren't using AutoPay, you might want to consider it, Kantrowitz said, since you will be much less likely to be late with a payment. This helps you avoid late fees and collection charges and improve your credit scores.

—If you are in an income-driven repayment plan and your income has decreased, you can ask the loan servicer to re-certify your income early to qualify you for a lower monthly loan payment. Extra money from the child tax credit isn't guaranteed

Democratic Sen. Joe Manchin of West Virginia cut a big hole in the financial safety net for many families when he declared on "Fox News Sunday" on Dec. 19 that he's a definite no on the current Build Back Better Act.

What happens going forward remains unknown. Families who face financial challenges will need to plan on what they'll do without the monthly payments.

On average, families are looking at losing roughly an average $444 a month from the expanded child tax credit, based on December data. About 36 million families received $16 billion in December.

In Michigan, the average monthly payment was $455 with a bit more than 1 million families receiving more than $464 million in December, according to a U.S. Department of Treasury report.

The monthly payments involving the child tax credit were introduced as part of the American Rescue Plan, which was signed into law March 11. Under the rescue plan, the child tax credit also became fully refundable, so even families with no income could get the full benefit — which is key to fighting childhood poverty.

The monthly payments were to be temporary, and set to run from July 15 through Dec. 15. Biden's Build Back Better package raised hopes for extending the monthly payments into 2022, as part of efforts to lift children out of poverty. And it would make permanent the full credit available to children in families with low or no earnings in a year.

While the House passed a $1.75 trillion package in November, the current version appears to have reached a dead end in the Senate. A scaled down bill could get new life, perhaps, in Congress in 2022.

The monthly payout amounted to up to $300 a month for children 5 and younger; and up to $250 a month for each child ages 6 to 17.

The enhanced credit amounted to up to $3,600 for each child 5 and younger, up from $2,000 for the existing child tax credit. For each child ages 6 to 17, the enhanced credit went up to $3,000 from $2,000.

Without action by Congress, the child tax credit goes back to $2,000 per child — and there is no provision for monthly payments.

This is one of those cases where families must start the New Year prepared for the possibility that the child tax credit won't be as favorable as it was in 2021.

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