Student loans, child tax credit unknowns could shock budgets in 2022

<p><p>The new year could prove to be painful on the wallet for many consumers, particularly some college graduates and young families.</p></p><p><p>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 May, the prices for food and other items remain high and the future of the child tax credit looks extremely dim.</p></p><p><p>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.</p></p><p><p>Here’s a look at what to expect ahead:</p></p><p><h3>Student loan debt could get thrown back on the pile of bills</h3></p><p><p>Millions of borrowers had faced a looming Feb. 1 date for when they’d have to restart making payments on federal student loan debt.</p></p><p><p>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.</p></p><p><p>Those payments will need to resume May 1 now, based on the new extension.</p></p><p><p>The pause on student loan payments will help 41 million borrowers save $5 billion per month, according to the U.S. Department of Education.</p></p><p><p>“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.</p></p><p><p>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.</p></p><p><p>The student debt payment pause, which began in March 2020, has been repeatedly extended.</p></p><p><p>The last extension, announced in August, was set to run through Jan. 31 and was dubbed as the “final” extension.</p></p><p><p>Once the moratorium ends, those federal student loans on pause would once again accrue interest.</p></p><p><p>As part of financial relief offered during the COVID-19 emergency, a pause was put in place on the repayment of student loans.</p></p><p><p>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.</p></p><p><p>The economy has improved significantly since the economic collapse in the spring of 2020.</p></p><p><p>The U.S. unemployment rate declined dramatically, landing at 4.2% in November.</p></p><p><p>An argument can be made that it’s time for student loan payments to begin once again.</p></p><p><p>Now, though, there is more concern about how the jobs picture and the economy will be hurt by the spread of the omicron variant.</p></p><p><p>“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.”</p></p><p><p>Delinquency rates, he said, are better than they were before the pandemic.</p></p><p><p>Among those who didn’t qualify for the payment pause and interest waiver, forbearance rates have returned to norms before the pandemic.</p></p><p><p>“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.</p></p><p><p>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.</p></p><p><p>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.</p></p><p><p>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 <span class=”print_trim”>in the family</span>.</p></p><p><p>About 18 million borrowers will have gone nearly two years without having to make a student loan payment, according to the letter.</p></p><p><p>The letter noted that about $7 billion a month will go toward student loan payments if payments resume.</p></p><p><p>The letter urged Biden to extend the pause on student loan payments and act to cancel student debt.</p></p><p><p>While student borrowers can breathe a bit easier now, Kantrowitz said it will be important in the months ahead to take actions to make sure that payments can resume smoothly.</p></p><p><p>They include the following:</p></p><p><p>• Update 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.</p></p><p><p>• Update your contact information at</p></p><p><p>• 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.</p></p><p><p>• 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.</p></p><p><p>This helps you avoid late fees and collection charges and improve your credit scores.</p></p><p><p><span class=”print_trim”>• 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.</span></p></p><p><h3>Extra money from the child tax credit isn’t guaranteed</h3></p><p><p>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.</p></p><p><p>What happens going forward remains unknown. Families who face financial challenges will need to plan on what they’ll do without the monthly payments.</p></p><p><p>On average, families are looking at losing roughly an average $444 a month from the expanded child tax credit<span class=”print_trim”>, based on December data</span>. About 36 million families received $16 billion in December.</p></p><p><p><span class=”print_trim”>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.</span></p></p><p><p>The monthly payments involving the child tax credit were introduced as part of the American Rescue Plan, which was signed into law March 11.</p></p><p><p><span class=”print_trim”>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.</span></p></p><p><p><span class=”print_trim”>The monthly payments were to be temporary, and set to run from July 15 through Dec. 15.</span></p></p><p><p><span class=”print_trim”>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.</span></p></p><p><p><span class=”print_trim”>And it would make permanent the full credit available to children in families with low or no earnings in a year.</span></p></p><p><p><span class=”print_trim”>While the House passed a $1.75 trillion package in November, the current version appears to have reached a dead end in the Senate.</span></p></p><p><p><span class=”print_trim”>A scaled down bill could get new life, perhaps, in Congress in 2022.</span></p></p><p><p><span class=”print_trim”>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.</span></p></p><p><p><span class=”print_trim”>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.</span></p></p><p><p><span class=”print_trim”>For each child ages 6 to 17, the enhanced credit went up to $3,000 from $2,000.</span></p></p><p><p><span class=”print_trim”>Without action by Congress, the child tax credit goes back to $2,000 per child – and there is no provision for monthly payments.</span></p></p><p><p><span class=”print_trim”>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.</span></p></p><p><p><span class=”print_trim”>“The Biden Administration is clearly having a difficult time getting its social infrastructure spending bill through Congress. It remains to be seen what the final form of the child tax credit looks like,” said Robert Dye, chief economist at Comerica Bank.</span></p></p><p><p><span class=”print_trim”>On Dec. 17, the White House indicated that it is considering sending families “double payments in February” for the child tax credit, if a deal could get done in January.</span></p></p><p><p><span class=”print_trim”>But even that looked unlikely just a few days later after Manchin’s blunt rejection.</span></p></p><p><p><span class=”print_trim”>Families might not get any monthly payments until March – if at all, based on some outlooks.</span></p></p><p><h3><span class=”print_trim”>Plan to pay more</span><br/><br/></h3></p><p><p><span class=”print_trim”>As some families see budget shortfalls, they’re also getting hit by sticker shock at the grocery store and elsewhere.</span></p></p><p><p><span class=”print_trim”>Many consumers anticipate that they need to factor rising prices into their budgets, according to a new KPMG Consumer Pulse Survey’s Grocery Forecast for 2022.</span></p></p><p><p><span class=”print_trim”>According to the survey, consumers are expecting to spend an average of $611 a month on groceries in 2022, compared to $532 a month in 2021. That’s a 14% increase.</span></p></p><p><p><span class=”print_trim”>Price hikes in the Midwest are even worse for consumers. In the Midwest, including Michigan, the consumer price index jumped by 7.3% in November from a year ago.</span></p></p><p><p><span class=”print_trim”>For the country, the CPI soared 6.8% in November from a year ago – the fastest pace since 1982.</span></p></p><p><p><span class=”print_trim”>Food prices in the Midwest jumped 7.1%, reflecting higher prices for food at the supermarket and higher prices at restaurants.</span></p></p><p><p><span class=”print_trim”>The biggest jump in the food category was for meat, poultry, fish and eggs – where prices for those items rose 11.8% in November from a year ago.</span></p></p><p><p><span class=”print_trim”>Energy prices in the Midwest skyrocketed 36.7% in November from a year ago, largely the result of an increase in the price of gasoline, according to the U.S. Bureau of Labor Statistics.</span></p></p><p><p><span class=”print_trim”>Consumers have limited plans of attack here: Find lower cost alternatives, comparison shop, pay more attention to sales and coupons, stop buying some items entirely and, sometimes, just hand over more money to buy what you need.</span></p></p><p><p><span class=”print_trim”>A bit of hope could be on the horizon.</span></p></p><p><p><span class=”print_trim”>“Inflation is probably already peaking at the end of 2021,” said Bill Adams, vice president and senior economist for The PNC Financial Services Group.</span></p></p><p><p><span class=”print_trim”>Adams noted that wholesale oil prices have pulled back from the high points reached in late October, and that’s likely to contribute to lower prices at the pump over time.</span></p></p><p><p><span class=”print_trim”>He expects demand to cool for appliances, electronics and the like, putting a cap on price hikes there, too.</span></p></p><p><p><span class=”print_trim”>But Adams warned that wages have risen significantly – and are likely to continue to rise rapidly in a tight job market – putting pressure on prices and inflation.</span></p></p><p><h3><span class=”print_trim”>Coronavirus holds a lot of the cards</span><br/><br/></h3></p><p><p><span class=”print_trim”>Many forecasts for 2022 had fairly favorable outlooks for the U.S. economy.</span></p></p><p><p><span class=”print_trim”>Some growth is likely to be hurt, though, if the omicron variant spreads rapidly and proves to be as troubling as many fear.</span></p></p><p><p><span class=”print_trim”>A recession isn’t in the cards for 2022, according to many economists, but they acknowledge that our financial health will depend on the path of the virus.</span></p></p><p><p><span class=”print_trim”>“The coronavirus pandemic is still the biggest risk factor for the U.S. economy,” Comerica’s Dye said.</span></p></p><p><p><span class=”print_trim”>Dye’s assuming that the country won’t see more widespread business restrictions, outside of travel and leisure-hospitality industries.</span></p></p><p><p><span class=”print_trim”>Going forward, Dye said, he expects to see solid economic performance in the United States “as supply-chain constraints unwind and pent-up demand is spent out.”</span></p></p><p><p><span class=”print_trim”>Dye noted that strong inflation and decreasing savings may be weighing on consumer demand for some items.</span></p></p><p><p><span class=”print_trim”>Softer consumer spending would be a downside risk in the near term.</span></p></p><p><p><span class=”print_trim”>The emergence of the omicron variant and the uptick in COVID-19 cases in many states, including Michigan, could prove to be a serious challenge for the economy.</span></p></p><p><p><span class=”print_trim”>Many, of course, fear that we could be looking at a “2020 too” situation.</span></p></p><p><p><span class=”print_trim”>The omicron variant is likely to slow economic activity in the weeks ahead.</span></p></p><p><p><span class=”print_trim”>“But each successive wave of the pandemic has had less of an impact on employment, consumer spending, and other aspects of the economy,” Adams said, “so the drag on near-term growth will most likely be less than the 2020-21 winter wave.”</span></p></p><p><p><span class=”print_trim”>“For 2022 as a whole,” he said, “the huge amount of savings accumulated since the pandemic began will continue to support consumer spending.”</span></p></p><p><h3><span class=”print_trim”>Not all is bleak</span><br/><br/></h3></p><p><p><span class=”print_trim”>We are looking at less stimulus in the economy if the child tax credit ends and student loan repayments restart – and many families facing financial challenges will feel that pull back the hardest.</span></p></p><p><p><span class=”print_trim”>But Adams noted that lots of stimulus money remains in the pipeline in state and local government accounts that have yet to go out the door.</span></p></p><p><p><span class=”print_trim”>“That will keep fiscal policy fairly supportive of growth next year,” Adams said.</span></p></p><p><p><span class=”print_trim”>He also expects that supply chain problems will improve in 2022.</span></p></p><p><p><span class=”print_trim”>“Auto sales in particular are expected to be a bright spot in 2022 as the car makers put the chip shortage behind them and ramp up production,” Adams said.</span></p></p><p><p><span class=”print_trim”>One big wild card could be how many people show up for work in January and beyond.</span></p></p><p><p><span class=”print_trim”>Federal Reserve Chairman Jerome Powell raised the possibility that intensified fears about the virus could “reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.”</span></p></p><p><p><span class=”print_trim”>Will early retirees and others be willing to fill part-time jobs?</span></p></p><p><p><span class=”print_trim”>Will older workers return to the labor force to keep things moving along? (Kind of like when Tom Hanks, 65, pitched in to keep Saturday Night Live going during some last minute changes Dec. 18 amid rising COVID-19 cases.)</span></p></p><p><p><span class=”print_trim”>Adams pointed out that about a million Americans took early retirement since the pandemic began.</span></p></p><p><p><span class=”print_trim”>“When older Americans feel confident that they can work safely in jobs where they have lots of interaction with groups of people, there will probably be a big boost to potential labor supply,” Adams said.</span></p></p><p><p><span class=”print_trim”>“That would be great news for the economy as a whole, raising potential GDP, raising earned incomes and reducing inflationary pressures.”</span></p></p><p><p><span class=”print_trim”>Inflation – and higher prices – remain a concern and the Federal Reserve could raise short term interest rates three times in 2022.</span></p></p><p><p><span class=”print_trim”>Dye noted that the Federal Reserve made no commitments at its Dec. 15 meeting for when we’d see an “interest rate liftoff.”</span></p></p><p><p><span class=”print_trim”>But he’d expect rate hikes to start in the second quarter of 2022, either at the end of April or mid-June.</span></p></p><p><p><span class=”print_trim”>The rules of the game will definitely be different in 2022 than 2021 and families will need to adjust their budgets accordingly.</span></p></p><p><p><span class=”print_trim”></span></p></p><p><p><span class=”print_trim”></span></p></p><p><p><span class=”print_trim”></span></p></p>