Americans are worried about paying back their student loans

A growing number of Americans are worried about defaulting on their student loan debt after a three-year payment hiatus, according to new data published by MassMutual.

The data, published Tuesday morning, indicates that three months after the federal student loan payment pause ended, about three in five affected individuals are concerned they may have to file for bankruptcy in order to eliminate their debt.

On top of that, one-third of respondents said they do not expect to fully pay off their loans before they retire.

"Student loan payments are still playing the Grinch this holiday season, and many Americans are wisely making lifestyle changes to pay off their debt while planning to spend thoughtfully," said Paul LaPiana, a chief financial planner and the head of the MassMutual brand.

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There was a pandemic-era freeze on federal student loan payments in place since March 2020. However, that pause officially ended at the beginning of October, setting up a potential financial shock for millions of Americans.

The average monthly bill hovers between $200 and $299 per person, although it is even higher for some borrowers, according to the most recent Federal Reserve data.

Collectively, borrowers resumed paying about $10 billion a month, according to an analysis from JPMorgan.

The MassMutual report suggests that Americans are feeling the pinch from the resumption of payments. A staggering 76% of respondents with student loan debt said the re-start of payments has had a "negative impact on their day-to-day health."

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The findings come amid evidence that more Americans are filing for bankruptcy in order to offload their student loan debt. 

The Department of Justice said in a news release published in November that 632 borrowers filed to use bankruptcy in order to eliminate student loans in the period from November 2022 through September 2023, an increase from earlier levels. By comparison, the pre-pandemic average annual rate was about 480.

"The departments anticipate that this trend will continue," the Justice Department said in the release.

The uptick in bankruptcy filings comes one year after the Biden administration introduced a new legal pathway that made it easier for borrowers to discharge federal student loan debt in bankruptcy.

The updated guidelines from the Justice and Education departments, announced in November 2022, were designed to make it easier for the government to identify whether to grant a discharge without "unnecessarily burdensome and time-consuming investigations." 

Congress had previously set a higher bar for discharging student loan debt when compared to other types of debt like medical or credit card, requiring borrowers who seek to file for bankruptcy to demonstrate they will suffer "undue hardship" if the debt is not discharged. 

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Now, borrowers must prove they meet three criteria in order to offload their student loan debt: lack the ability to repay the loan currently, are unable to repay the loan in the future and made a good-faith effort to repay the loan.

The government said the latest data on loan discharges suggested the rule change has succeeded in making it easier for eligible borrowers to achieve a bankruptcy discharge of their federal student loan debts.

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"One year ago, we set out to simplify and improve the process for student loan borrowers in bankruptcy," said Associate Attorney General Vanita Gupta in the news release Thursday. "Our one-year review indicates that our efforts have made a real difference in borrowers’ lives by ensuring student-loan discharges are more accessible to eligible borrowers." 

The policy shift is part of President Biden's efforts to reduce or eliminate student loan debt for Americans.

The Supreme Court earlier this year struck down Biden's student loan forgiveness plan that would have wiped out up to $20,000 in loans per borrower.

Since then, the White House has announced other efforts to reduce student loan debt, including erasing $127 billion of debt owed by about 3.6 million borrowers.