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Even if we’re currently taking advantage of the suspension of student loan repayment, we should all be prepared for its termination. The government defaulting on its borrowing is something I do not anticipate. But what I come to mind is how would the debt ceiling crisis impact student loans if they do?
According to what I can tell, the government has always raised the debt ceiling without ever defaulting. It ultimately comes down to congressional majority and further negotiations.
Table of Contents
What is a debt ceiling?
In 1917, Congress established the debt ceiling. The federal government can only borrow up to that amount in order to operate and service its debt.
Consider applying for a credit card. The credit card provider will determine the maximum amount you are permitted to spend on the card based on your credit score. If your credit card is maxed out, you’ll need to find another place to borrow money. Your financial condition will become more stressful as a result. It can be disastrous if not handled responsibly.
The Government dilemma
The federal government must appear before Congress if they want to continue borrowing money to cover expenses, pay employees, carry out schemes, and purchase other financial assets.
The Treasury is responsible for paying the bill when taxes and other sources of income fall short of covering government expenses. As a result, the federal government issues treasury bonds, often referred to as irrevocable obligations (IOU), to raise money.
Investors anticipate to receive their money back with interest once these bonds are released, making the government poorer but not changing the financial situation of the federal government as a whole.
Since the Republicans have held the majority in the House of Representatives since last year, negotiations are inescapable. In order to prevent a default, they must agree to raise the debt ceiling cap.
What impact the debt crisis could have on student loans?
Assume there is no agreement between the two parties. The US economy will become tense as a result. Layoffs, a possible government shutdown, suspension of payments to some government employee savings programs, and rising borrowing costs can push us into a “official” recession.
Higher interest rates: Borrowing costs typically increase during a financial crisis as lenders become less risk-resistant. This might lead to higher interest rates on student loans, increasing the cost of borrowing money for students’ education. As a result of the higher interest rates, students can end up with greater debt in the long run.
Lower availability of loans: The government or financial institutions may restrict the total number of student loans available in an effort to decrease risks during a debt crisis. They might set harsher restrictions on lending numbers or fewer loan programs. For students who rely on loans to pay for their education, this may provide difficulties.
Affects loan repayment: Borrowers who have already received their degrees and are making student loan repayments are like I have no concerns about making my student loan payments in time. Why? since I am aware that my fixed interest rate is low compared to the new rate today. I’m concerned about my cousin’s ability to make a living and repay his debt after recently graduating. Graduates might have trouble obtaining well-paying positions if the crisis triggers an economic slump, which might make it more difficult for them to repay their student loans. High rates of underemployment or unemployment might raise loan default rates.
I have no concerns about making my student loan payments in time. Why? since I am aware that my fixed interest rate is low compared to the new rate today. I’m concerned about my cousin’s ability to make a living and repay his debt after recently graduating.
As of the time this post was written, a 10-year fixed rate might range from 6.99% to 10.69% depending on your credit score.
With that said, it will get harder for many borrowers to be able to pay back their student loans.
In Conclusion
The debt ceiling problem is becoming more complicated, which makes it more difficult for students to pursue their educational goals. Understanding the effects of this financial situation, including capital availability, prospective high interest rate, lower availability of loans and repayment flexibility, is critical.
Borrowers can lessen the impact of the debt ceiling issue on their student loan experiences by remaining informed, getting advice, and looking into alternate financing choices. We can work to resolve the financial issues brought on by the debt ceiling situation and pursue a more promising future in education and beyond by banding together.
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