Federal Reserve: US could enter another 'credit crisis' if student loan debt isn't forgiven

The future of President Joe Biden’s Student Loan Forgiveness program is now in the hands of the Supreme Court. Tuesday, Justices heard arguments in two cases as they decide whether the president has a constitutional right to cancel billions of dollars in federal loans.

The congressional budget office estimates the program would cost an estimated $400 billion. Justices wondered if it was fair to taxpayers.

“What I think they argue, that is missing, is cost to other persons in terms of fairness, for example, people who’ve paid their loans, people who don’t … have planned their lives around not seeking loans, and people who are not eligible for loans in the first place,” said Justice Neil Gorsuch.

“I’m wondering whether or not the same fairness issue would arise with respect to any federal benefit programs,” said Justice Ketanji Brown Jackson.

RELATED: Experts share advice on repayment as student loan relief battle goes to Supreme Court

An estimated 40 million Americans have applied for relief through the program, which could provide forgiveness of up to $20,000 per borrower.

Meanwhile, credit experts are urging student loan borrowers to prepare for the worst and get ready for their monthly student loan payments to kick back in by at least August.

Paul Oster, the CEO of Better Qualified, a credit management company, said student loans are a great way to build up credit, but they can also be a way to destroy it.

“A one-time 30 late-day payment on a student loan could easily cost that person 50-100 points,” Oster said. “So, our credit score is going to cost or save us money every day. This is a situation where if you lose 50-100 points and then you have to buy a car, or you need a credit card, and certainly if you’re going to buy a home, those interest rates are going to be astronomical.”

Late last year, the Federal Reserve reported household debt rose to $16.9 trillion. It said young borrowers are struggling the most. The Fed also reported credit card balances increased by $61 Billion reaching $986 billion, which is higher than the pre-pandemic high.

The Fed put out a pretty stark warning that if the student loan forgiveness program doesn’t pass, the U.S. could face another credit crisis.

When we asked Oster about those implications, he said the country is in an environment like never before – dealing with multiple macroeconomics like the pandemic, the war in Ukraine and China, plus inflation and high-interest rates.

“No one knows how we’re going to navigate these waters. This is an opportunity for us as a country to say hey, wait, we better take a look at how to help these young people get out of this debt because if we don’t, maybe they won’t buy a house or the new car, they aren’t going to have money to spend,” Oster said.

Oster adds if a parent co-signed on any student loans for their child and the child doesn’t pay it back, it will be the parent’s responsibility.

Oster said people should reach out to the lenders and creditors that they pay those student loans back to because he said they don’t want to see you default on your loans and will find ways to work with and help you.

He said you should head to www.Studentaid.gov for the latest information, so you don’t get caught up in a scam. Plus, there are income-based payment plans and grants available to people depending on where they work and live. Oster said those should help.

Lastly, if you paid any of your student loans during the pandemic deferment period, you can get that money back. Oster encourages you to do that, so you have the money ready to go when payments kick back in to put you slightly ahead and give you some extra time to figure out where the rest of the money will come from.