Arizonans have $34B in student debt. Federal officials will start garnishing some borrowers' wages

The Trump administration says it’s going to start garnishing the wages of student loan borrowers who are at least 270 days past due on their payments.

Federal officials say that’ll only happen after borrowers get notice of the action and have a chance to repay their loans. This follows attempts by the Biden administration to forgive student loans; those efforts were struck down by the courts.

The U.S. Education Department says as of last September, there were more than 924,000 borrowers in Arizona; combined, they carry nearly $34 billion in debt.

With The Show to talk more about this is economist Luis Cordova, vice president of Rounds Consulting Group.

Stacy Elizebeth

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Full conversation

MARK BRODIE: How big of an economic impact might this move by the administration have?

LUIS CORDOVA: So this won't necessarily derail the economy, but it does make life harder for households already struggling, and that can show up in local spending.

So when you, when you look into the numbers, it's, I think it's about 1 in 6 borrowers are severely delinquent on payments. So that means that the majority of borrowers are not directly affected by garnishment. So this is not likely to create a large economic shock.

However, the impact is highly concentrated among lower income borrowers, households that are already financially stretched. So for those households, a $200 to $300 monthly payment is meaningful. This could mean cutting back on discretional spending, like going out to eat or going on a trip. So these cuts in discretional spending could have a small impact on local retail, restaurants and service.

BRODIE: So as you say, it sounds like the biggest impact is going to be on families or borrowers that are already not doing great. This is going to be kind of one more thing that helps them continue to not do great. Is that a fair assessment?

CORDOVA: Right. So the impact really is, you know, it's a, I would say, like uneven impact. So the real, the real impact will be on those households that are experiencing current hardship. So they could, you know, continue putting off on other financial decisions like remodeling their homes, buying homes, or even starting a family. But really it's, it's going to be more about cutting back on discretional spending.

BRODIE: Might this have an impact on the state's economy more broadly? If folks who are already, as you described, maybe not doing well, they're stretched financially, if they need, for example, based on losing some of their wages to pay off these debts, if they start to perhaps, for example, rely on state services, might that have an impact there?

CORDOVA: There could be an impact there. Again, because it is such a small percentage that is severely delinquent, it's not likely to be a huge number, but really it's going to be, you know, at the individual level, really, to see what the impact is there.

BRODIE: Do you think that by the federal government taking this action, will it make potential borrowers think differently about whether or not they want to take out a student loan in the first place?

CORDOVA: That's a good question. So, so in general, education still is, still has a strong return on investment. I mean, there's no question about that. Higher education leads to higher lifetime earnings, improved job stability, expanded career options.

But like any investment, outcomes will vary. So student loans can be a good investment. But like, but like any investment, you have to be smart about it.

BRODIE: So you mentioned that this is most likely to affect sort of a concentrated group of borrowers. But I wonder if, based on economic factors, more people could sort of be pulled into this. 

Like, is it possible that, you know, depending on how the economy goes, people who have been or are currently able to repay their student loans might not be able to do that at some point, and they could also have their wages garnished and maybe start this cycle of impact maybe a little bit bigger than what it looks like it might be now?

CORDOVA: Yeah, so that's something we do have to keep an eye out on because the economy has been slow and with a lot of the federal actions that are going on, that can still put a drag on a lot of these inflationary factors that we're having.

So affordability is still going to be an issue this coming year. Housing costs are still very high, inflation is persistent, and any minor shocks to the economy, like say we do go into even a mild recession where we do have a lot of layoffs, that sort of thing, then this could become a real big problem for sure.

BRODIE: What's the benefit to the federal government of doing this?

CORDOVA: Well, I mean, like any kind of loan, you know, student loan is like a credit card, right. So the money was used up front. So really it should be paid back.

It goes into, you know, should the federal government forgive loans? You know, targeted forgiveness makes sense in specific areas like public service roles. Teachers, nurses, first responders, also in areas where there are critical workforce shortages and cases of institutional failure or fraud. So those programs serve a public benefit and they help attract and retain workers where we need them the most. So forgiveness makes sense there.

But across the board, forgiveness is expensive and it really raises fairness concerns and it can encourage future overborrowing. So broad forgiveness creates real fairness issues, especially for people who already paid their loans or chose not to borrow. But targeted forgiveness makes economic sense.

BRODIE: I know that we've talked about that this is sort of a small group of borrowers who are going to be affected, but I'm curious to get your take on this. The Education Department, the federal Education Department says that borrowers in Arizona hold nearly $34 billion in debt. 

That seems like an awfully big number. And based on what you were saying earlier about potential economic shifts, it almost seems like that's kind of like a dark cloud almost hovering over people and maybe the state, depending on how things go. It just seems like an awfully big number for debt that, you know, at some point could get called in against, you know, the, the ability to pay of people who hold it.

CORDOVA: Yeah, you're you're right. So, so one thing we saw, you know, when student, when we did have a pause on student loan payments is we did see a lot of spending in the economy which contributed to inflation. But that's why at the state level we saw, you know, a lot of sales tax revenues coming in. And that is because people had more money to spend.

So, so it's kind of a, so it's really a shift of where that money is spent and in terms of like state revenues, you know, there's, there's a tax on, on retail sales. So we would want to have that shift move more towards, you know, restaurants, retail shops, that kind of thing. So really you're just moving the money to be spent somewhere. Yeah, that is something to keep an eye out.