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Defaulting on federal student loans can trigger other major financial consequences for borrowers, including a lower credit score and wage garnishment.
A new Department of Education program gives those who’ve fallen behind on their student debt a limited chance to get into current standing.

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Falling behind on federal student loans is likely to trigger other major financial consequences for borrowers, according to new research by The Pew Charitable Trusts.
More than 80% of borrowers who experienced default stated that they’d faced at least one additional consequence as a result. The most common impact was a drop in their credit score (62%) followed by being subject to collection fees (47%) and losing eligibility for future federal financial aid (37%).

Other consequences that followed from a default on federal student loans included wage garnishment, the suspension of professional licenses and having Social Security or tax refunds offset.
(The research organization NORC at the University of Chicago conducted an online survey on behalf of Pew in the summer of 2021 studying borrowers’ experiences, focusing on those who had defaulted on a federal student loan. The sample included 1,609 respondents.)
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“Low credit scores can make it harder to get other kinds of credit that are important to borrowers’ financial lives, like home loans, car loans and credit cards,” said Phillip Oliff, director of Pew’s student loan research project. “Despite these penalties, rates of default and redefault are alarmingly high.”
Most recently, U.S. Department of Education Undersecretary James Kvaal said that if the government isn’t allowed to carry out its sweeping student loan forgiveness plan, there could be a “historically large increase in the amount of federal student loan delinquency and defaults as a result of the Covid-19 pandemic.”

Many unaware of consequences of default

The Pew survey found that many borrowers aren’t aware of specific consequences of defaulting on their federal student loan debt. A third or less of respondents knew, for example, about the possibility of collection fees or wage garnishment prior to falling behind.
“The consequences of default are not just punitive but also intended to recover the funds for the federal government,” said higher education expert Mark Kantrowitz.
In addition to the financial setbacks, respondents reported “a high emotional toll” connected to experiencing the consequences of default “with themes of sadness, depression and anger.”

A borrower is typically considered to be in default when they’ve been past due on their debt between 270 days and 360 days.
Federal student loan payments have been on pause since March 2020, when the coronavirus pandemic first hit the U.S. and crippled the economy. They’re scheduled to resume 60 days after the legal troubles over the Biden administration’s student loan forgiveness plan resolve, or by the end of August, whichever comes sooner.
Collection activity on the debt remains on pause as long as the bills do.

Defaulted borrowers get a ‘fresh start’

Fortunately, the U.S. Department of Education is also providing federal student loan borrowers who’ve fallen behind on their debt a chance to get into current standing.
As part of its “Fresh Start” initiative, the 7.5 million student loan borrowers who are in default are able to return to repayment without a past-due balance. The program was announced last spring.
Once it officially launches, borrowers will start by choosing a repayment plan at MyEdDebt.Ed.Gov or by calling the Education Department’s Default Resolution Group at 800-621-3115, Kantrowitz said.

Your loans should then be transferred from the Default Resolution Group, which is run by Maximus, to a new servicer.
After you’ve been matched with a new servicer and are enrolled in a payment plan, the default should be automatically cleared from your record, Kantrowitz said.
The opportunity is temporary, however. Borrowers will have a one-year window to switch into a new repayment plan and to start making payments when the Covid suspension of bills concludes, which could be as early as May. Take action as soon as you’re able, Kantrowitz added, “to avoid the last-minute rush.”

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Even as college applications surge, a number of institutions are in financial jeopardy.
Smaller, less selective schools have been the hardest hit, while the country’s most elite colleges and universities continue to thrive.

Citing inflationary pressures and sinking enrollment, more colleges are set to close in 2023.
Already, Presentation College in Aberdeen, South Dakota; Cazenovia College in Cazenovia, New York; Holy Names University in Oakland, California; and Living Arts College in Raleigh, North Carolina, announced they will shut down after the current academic year.

The consequences of fewer students and less tuition revenue since the start of the pandemic have been severe, according to Kristin Reynolds, a partner and leader of NEPC’s Endowments and Foundations practice.
“Larger institutions can weather the storm,” she said.
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The number of colleges closing down in the past 10 years has quadrupled compared with the previous decade, according to a report in The Wall Street Journal.
Not only have many smaller institutions struggled as students opt for less expensive public schools or alternatives to a four-year degree altogether, but economic uncertainty and inflation also continue to weigh on markets, taking a hefty toll on endowments and leaving more colleges and universities in financial jeopardy.

Meanwhile, the country’s most elite institutions are thriving.

College applications jump

Harvard University campus in Cambridge, Massachusetts.
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Coming out of the pandemic, a small group of universities, including many in the Ivy League, experienced a record-breaking increase in applications this season, a report by the Common Application found.
The report said the number of college applicants has jumped 20% since the 2019-20 school year, even as enrollment has slumped nationwide, suggesting more students are applying to the same schools.
“For brand-name colleges, the demand is off the charts,” said Hafeez Lakhani, founder and president of Lakhani Coaching in New York. “It’s never been harder to get in.”

The majority of people are going to say, ‘Is that worth my while?’

Hafeez Lakhani
founder and president of Lakhani Coaching

On the other hand, private colleges that are less prestigious but equally expensive are struggling to attract applicants, he added. “The majority of people are going to say, ‘Is that worth my while?'”
College is becoming a path for only those with the means to pay for it, other reports also show. 
And costs are still rising. Tuition and fees plus room and board for a four-year private college averaged $53,430 in the 2022-2023 school year; at four-year, in-state public colleges, it was $23,250, according to the College Board.
Now, the majority of applicants hail from the wealthiest zip codes, the Common Application found.

Higher education endowments take a hit

Although the investment performance for college and university endowments sank in 2022 overall, the losses were not shared equally across the board, according to a separate report by the National Association of College and University Business Officers.
Colleges and universities with the largest endowments, or more than $1 billion in assets, performed better than smaller schools with less than $25 million, which were the weakest performers, posting average returns down 11.5%, compared with an average loss of 4.5%, the report found. 

Arrows pointing outwards

As a result, universities such as Harvard, Yale, Stanford and Princeton are able to maintain or even expand their financial aid offerings, lowering the cost and increasing the appeal to more students nationwide.
“The largest endowments are able to support their schools a little bit more,” Reynolds said. “These colleges are continuing to attract students through scholarships and that makes them more competitive.”
That means other schools will only continue to struggle, Lakhani predicted. Going forward, “more colleges will either close departments or shut down,” he said.
Correction: This story has been updated to accurately state the academic year Common Application used to calculate the percentage increase in the number of college applicants. An earlier version incorrectly cited the increase as year over year.
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Democratic lawmakers are renewing a proposal aimed at helping to narrow the wealth gap in the U.S.
“Baby bonds” of $1,000 per child, plus up to $2,000 per year based on income, may help pay for tuition or other costs once they turn 18.
Here’s how the proposal would work.

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Democratic lawmakers in Washington are renewing a proposal to give every American child $1,000 at birth.
The “baby bond” funds, called American Opportunity Accounts, would then be topped off with up to $2,000 per year, depending on a family’s income.

The accounts would be federally insured and managed by the U.S. Department of the Treasury.
Account holders would be able to access the funds once they turn 18 to pay for eligible uses, such as higher education or homeownership.
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The bill, called the American Opportunity Accounts Act, was re-introduced last week by Sen. Cory Booker, D-N.J., and Rep. Ayana Pressley, D-Mass.
For a family of four with less than $25,100 in income, the accounts may reach $46,215 by the time a child reaches 18, based on 2019 estimates. Those sums would be reduced for families with higher incomes, as annual supplement payments gradually phase out. For a family of four with income of $125,751, a child turning 18 would see an estimated account balance of $1,681, with $0 annual payments.

Taxing estates, heirs to give youngest Americans a lift

The legislation calls for making the changes fully paid for by raising inheritance and estate taxes. A 2019 analysis by the Committee for a Responsible Federal Budget found the bill’s proposed revenue increases would more than offset the cost of the legislation.
“‘Baby bonds’ would fix our broken tax code by providing every American child with start-up capital for their life, and helping to drive down the wealth inequality that holds American families back from their full potential,” Booker said in a statement.
The policy is aimed at narrowing the wealth gap, which has grown dramatically in the past 50 years, according to the lawmakers. It may also help the persistent racial wealth gap.

In 2016, Black households had a median wealth of $17,100 and Hispanic households had $20,600, while white households’ wealth was a median of $171,000, according to the Pew Research Center.
The idea of baby bonds is getting traction in some states.
Baby bond legislation has passed in California, Connecticut and Washington, D.C. Another eight states have introduced legislation, according to the Urban Institute, including Iowa, New Jersey, New York, Wisconsin, Washington, Delaware, Nevada and Massachusetts.
The terms for how much funds would provide, as well as permitted uses for the money, varies. The total endowments by adulthood start from $3,000. The federal proposal, which would provide almost as much as $50,000 to the lowest income families, is the most generous.

Bipartisan support varies on federal and state levels

The reintroduction of the federal proposal provides an opportunity for a more universal program, rather than a state-by-state approach to baby bonds, noted Madeline Brown, senior policy associate at the Research to Action Lab at the Urban Institute.
A national policy may reduce the wealthy disparity between young white and Black Americans to a ratio of 1 to 4, according to the research. Estimates have found young white Americans have 16 times the wealth of young Black Americans, based on median incomes.
“Wealth isn’t just for the wealthy; it really is a component for financial health,” Brown said.
“If the goal is really to address wealth inequity, programs like baby bonds that are starting early and thinking about how do you actually grow dollars long term are really exciting because they can be an important tool in this whole financial security toolbox,” she said.

To date, the support behind the federal bill comes from the left side of the aisle, including Sens. Chuck Schumer, D-N.Y.; Elizabeth Warren, D-Mass.; and Bernie Sanders, I-Vt.
However, there is more bipartisan support at the state level, according to Brown. Part of that is due to residency requirements, Brown said, which may encourage young people to stay and join the workforce, buy homes and start families and businesses in the states.
In order for baby bonds to successfully address wealth gaps, the policies should have six components, according to the Urban Institute. That includes universal eligibility for all children; deposits that are progressive, or based on household wealth; terms that allow for flexible use of the funds for wealth-building activities like tuition, home purchases or starting a business; financing provided by the government; substantial endowments that would protect the principal while earning a return on the money; and making the young people the ultimate beneficiaries of the money.

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Federal student loan payments could resume as early as May, depending on how quickly the Supreme Court reaches a decision on student loan forgiveness.
The pandemic-relief policy has now been extended eight times and spanned nearly three years.

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Restart depends on Supreme Court decision timing

When student loan payments restart depends on how long the Supreme Court justices take to issue a decision on the president’s plan, said higher education expert Mark Kantrowitz.
In November, the U.S. Department of Education announced the latest extension to the payment pause on federal student loans, saying the bills would resume 60 days after the litigation over its student loan forgiveness plan resolves. If the legal issues with the administration’s forgiveness plan are still unfolding by the end of June, or if it’s not allowed to move forward with forgiving student debt by then, payments will pick up at the end of August.

“If the court issues a ruling a few weeks after the Feb. 28 hearing, repayment could restart in May or June,” Kantrowitz said. “If they wait until the end of the term in June or July, then there’d be an August or September restart.”
In an analysis of the last Supreme Court’s term, Kantrowitz found that half of the decisions were issued in June.

Servicers will determine when your payment is due

Federal student loan payments have been on pause since March 2020, when the coronavirus pandemic first hit the U.S. and crippled the economy. Resuming the bills for more than 40 million Americans will be a massive task.
When a borrowers’ payment is due again will depend in part on their timeline with their servicer, Kantrowitz said.
“They’re not going to restart everybody’s student loan payments on the same day, everywhere, all at once,” he said. “Most likely, borrowers will have the same payment due date as they did before the pandemic.”

And another extension is still possible, Kantrowitz added. He noted that the Education Department had said twice before on previous extensions of the payments pause that it would be the final extension — only to prolong it yet again.
During the extended payment pause, the Education Department is also ceasing all collection activity, it said, including the garnishment of wages and tax refunds.

Supreme Court will decide loan forgiveness fate

Shortly after Biden announced his sweeping plan to cancel up to $20,000 in student debt for millions of Americans, a number of conservative groups and Republican-backed states attacked the policy in the courts.
Two of these lawsuits — which the Supreme Court has agreed to hear oral arguments for — have been successful in at least temporarily halting the relief.
The high court justices should put an end to the uncertainty on loan forgiveness.

Sixty days will be enough to forgive student loan debt if the president’s plan survives.

Mark Kantrowitz
higher education expert

“The benefit of the Supreme Court ruling is that it will settle, for now, all of the litigation related to the loan forgiveness,” Dan Urman, a law professor at Northeastern University, said in an earlier interview with CNBC.
If the justices allow student loan forgiveness to go through, many borrowers will never have to restart payments. According to a White House estimate, roughly 20 million people could have their debt entirely cleared under the president’s plan.
“Sixty days will be enough to forgive student loan debt if the president’s plan survives,” Kantrowitz said. “They’ve already approved forgiveness for 16 million borrowers, so they just need to transmit this information to the loan servicers.
“It should take one to two weeks for the servicers to implement.”

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If you get paid biweekly as a W-2 employee, there are two months out of the year when you will receive three paychecks instead of two.
Depending on your pay schedule, the first one for 2023 could be in March.
Here’s how to plan for an extra check.

These are the three-paycheck months in 2023

If your first paycheck in 2023 was Friday, Jan. 6, your three-paycheck months will be March and September.
Otherwise, if your first paycheck in 2023 was Friday, Jan. 13, your three-paycheck months will be June and December.

How to make the most of a three-paycheck month

“March is a great time to receive that third paycheck,” said Winnie Sun, co-founder and managing director of Sun Group Wealth Partners, based in Irvine, California, and a member of CNBC’s Advisor Council.

Particularly with the tax deadline approaching, there are some smart strategies you can employ, she said, such as setting some funds aside if you expect to owe money this year or putting the cash toward your individual retirement account, which can potentially lower your tax bill.
But before making any investment moves, “if you have credit card debt, that needs to be paid off first,” Sun advised. As day-to-day expenses continue to rise, Americans are taking on more debt. At the same time, annual percentage rates are also heading higher, making it much more expensive to carry a balance.

“Now might be a really good time to have that extra cash, given the uncertainty in the economy,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York and a member of CNBC’s Advisor Council.
Still, rather than plan monthly expenses and savings from paycheck to paycheck, a better way to budget is to consider your income over the course of the year to smooth out the highs and lows and then view your cash flow on a monthly basis, Boneparth advised. (Here’s a simple way to make a monthly budget and start saving money.)
The “bonus” paycheck “is really an illusion,” he said.
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If you’re looking for ways to trim your yearly tax bill, experts may check your portfolio, since some investments are more likely to trigger taxes in certain accounts.
Generally, assets creating income are better suited for a tax-deferred or tax-free account.
However, you’ll also need to consider your goals and timeline when deciding where to keep your investments.

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If you’re looking for ways to trim your yearly tax bill, experts may check your portfolio, since some assets are more likely to trigger taxes in certain accounts.
Your 401(k) account offers tax-deferred growth, meaning you won’t owe levies on yearly income, such as dividends and capital gains.

By contrast, you may owe taxes for selling assets or receiving income in a brokerage account, which may be a surprise for some investors.
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“I definitely take that into consideration when I’m designing portfolios for clients,” said JoAnn May, a certified financial planner at Forest Asset Management in Berwyn, Illinois. “I always keep the taxability of assets in mind when strategizing where things are going to go.”
If you have three types of accounts — brokerage, tax-deferred and tax-free — you can pick the best spot for each asset, said May, who is also a certified public accountant. 
Since bonds may have less growth but distribute income, they may be suitable for tax-deferred accounts like your 401(k) plan, she said, and investments most likely to appreciate may be ideal for tax-free accounts, like a Roth individual retirement account.

However, if you don’t have the three account options, there may be other opportunities for tax efficiency, May said.
For example, if you have a large enough bond portfolio, you may have to put some assets in a brokerage account. But depending on your income, you may consider municipal bonds, she suggested, which generally avoid federal levies and possibly state and local taxes on interest. 
Other assets to avoid in a brokerage account are real estate investment trusts, or REITs, which must distribute 90% of taxable income to shareholders, said Mike Piper, a CPA at the firm in his name in St. Louis.

“If you have to have [funds] in taxable accounts, you want to make sure it’s generally something with low turnover,” he said.
Exchange-traded funds or index funds generally spit off less income than actively-managed mutual funds, which typically have year-end payouts.
Of course, taxes aren’t the only factor when deciding where to keep your assets. You’ll also need to consider your goals and timeline.

There’s a tax risk for all-in-one funds

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Another investment that’s better suited in tax-deferred or tax-free accounts is all-in-one funds, which attempt to create a whole portfolio, such as target-date funds, an age-based retirement asset.   
Since all-in-one funds contain different types of assets, there’s no ability to put certain portions, such as bonds spitting off income, into a more tax-efficient spot, Piper explained.  
These investments also limit your ability to use tax-loss harvesting, or sell assets at a loss to offset gains, because you can’t change the underlying holdings, he said. 

For example, let’s say your all-in-one fund has U.S. stocks, international stocks and bond funds. If there’s a dip in domestic stocks, you can’t harvest those losses by selling only that portion, whereas you may have that choice if you own each fund individually.
You may also see excess turnover from the underlying funds, creating capital gains that may be taxed at regular income rates, depending on the length of ownership.   
“They’re really just not a great fit for taxable accounts,” Piper added.

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Make purchases with a zero-interest credit card only. Any interest you pay for most credit card purchases you’re not paying off by the end of the month will negate any holiday sales savings.
Consider buying extra warranty coverage when the replacement cost for an item will be greater.
When car shopping, look for lower loan rates at local credit unions.

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Eager to take advantage of Presidents’ Day sales, many shoppers may not realize how much holiday discounts on a range of items – from mattresses to home appliances and electronics to new cars – could really cost them.
“Consumers should look closely at the fine print and long-term financial impact of spending around the holidays,” said Nicole Elam, president and CEO of the National Bankers Association, a trade group representing minority-owned and women-owned financial institutions. “For two reasons – the impact of inflation during a pandemic era and interest rates – what appears to be a deal may not be.”

Shopping smart is essential

“I love a sale,” said certified financial planner Kamila Elliott, CEO and senior wealth advisor at Collective Wealth Partners in Atlanta. But, before making that purchase, she said, it’s important to answer three questions.
“You have to ask yourself: Do you need it? Do you love it? And, can you pay it off immediately?”
Before you charge the purchase to a credit card, remember this is one of the most expensive ways to borrow money. The annual percentage rate on a credit card is at an all-time high of nearly 20%.
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“If you don’t have the ability to pay off the credit card debt immediately, you’re not even getting the savings from the sale because you’ll be paying that interest over a month or several months,” said Elliott, who is also a member of CNBC Financial Advisor Council.

Consider these three strategies to help save money while you shop for holiday sales:

Use a 0% interest credit card: With this type of introductory offer, you may pay no interest for 12 to 18 months. Make minimum monthly payments (or a little more) over the promotional period. Your goal should be to fully pay for the purchase before the 0% interest period ends and the rate goes back up. Credit experts say that a cash-back rewards credit card with a 0% interest introductory offer may be an even better deal. Several cash-back cards give back a flat rate of 1.5% of the amount of your purchase no matter what you buy.
Compare replacement cost vs. warranty: An extended home appliance or electronics warranty may give you peace of mind, but read the contract to see what exactly it covers. How long does the warranty last? Who will make repairs? How quickly?Compare the warranty’s cost over time to the replacement cost of that item, Elliott said. It may be more cost-effective to put that “extra” money in a special, savings account earmarked for a new appliance if yours breaks. In some cases, if the product is something you really need immediately – like your smartphone or laptop – it may be worth it to buy the warranty, Elliott said.
Look for lower loan rates at a credit union: Many car brands offer Presidents’ Day deals that lower the purchase price or interest rates or make lease deals more attractive. Still, with the rise in auto loan rates, you pay much more than you had imagined – or can truly afford to – drive the new car off the lot. Shop around and check out credit unions for lower interest rates.The average price for a new car was over $47,000 at the end of last year. Monthly payments averaged over $700 with some consumers paying $1,000 or more. Instead of paying over 6% in interest on a 60-month car loan through a bank or dealership, check out rates at a credit union. You may find rates under 5%.

No matter what you’re buying this holiday weekend, research the product’s price history, said Consumer Reports shopping editor Mary Beth Quirk. 
“If it’s recently been on sale for a lot less, you have some wiggle room in terms of how soon you need the item, you may want to wait to see if it drops again,” she said.
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With rents at historic highs, deciding what you should spend on housing is an increasingly difficult task.
Housing experts have some strategies to figure it out.

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There’s often a chasm between theory and practice, what we should do and what we actually do. Yet, when it comes to the long-held advice for renters to not spend more than 30% of their income on housing, the target is increasingly impossible to even try to reach, experts say.
“The old 30% guideline is just unrealistic these days,” said Marc Hummel, a licensed real estate salesperson at Douglas Elliman in New York.

More often, Hummel said, tenants spend 40% of their income, or more, on housing. “With vacancy rates at record lows and rents near some of the highest on record, it’s become increasingly more difficult to spend less,” he said.
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Indeed, nearly 15 million renter households in the U.S. are considered cost-burdened, meaning they’re spending more than 30% of their income on rent and utilities. In some cities, the situation is especially dire. For example, in New York, a household with the area’s median income would need to pay nearly 69% of their earnings to rent the average-priced apartment, according to Moody’s Analytics.
There are major consequences to taking on a rent that eats up too much of your income, Hummel said. “Spending more on rent means less money for savings, retirement, family goals and less to pay for other debt obligations,” he said.
Housing is the single biggest financial area where people get trapped, according to personal finance blogger and author Ramit Sethi. “Which is why it’s so important to follow some general guidelines when you’re deciding how much you can afford,” said Sethi, who wrote “I Will Teach You To Be Rich.”

‘A week’s pay for a month’s rent’

Renters used to be advised to spend even less than 30% on housing, said Andrew Aurand, senior vice president of research at the National Low Income Housing Coalition. In 1969, the Housing and Urban Development Act required public housing residents to contribute just 25% of their earnings toward rent, Aurand said.
“That percentage stemmed from the Depression of the 1930s, when a common rule of thumb was ‘a week’s pay for a month’s rent,'” he said.

In practice, there are a variety of factors that should determine what’s the right share for a household to spend on their housing, Aurand said. For example, a married couple without children may be able to spend more on their rent than another married couple with the same income that does have kids.
One simple way to measure if your housing costs are affordable, Aurand said, is to calculate how much of your income is left over to cover your other bills once your rent is paid.
“After paying for their housing, does the household have adequate income to pay for their non-housing expenses?” he said. “If not, they are considered cost-burdened.”

30% not a hard and fast rule

Renters shouldn’t look at the 30% guideline as a hard and fast rule, said Allia Mohamed, co-founder and CEO of Openigloo, which allows renters to review buildings and landlords across the U.S.
“Every renter is different,” Mohamed said.
High-income renters, for instance, should often spend below that threshold, she said. “Just because you make $300,000 a year doesn’t mean you should rent an apartment for $7,500 just because you can,” she said.

After paying for their housing, does the household have adequate income to pay for their non-housing expenses?

Andrew Aurand
senior vice president of research at the National Low Income Housing Coalition

Meanwhile, a lower-income tenant may be able to direct more than 30% of their income to housing if they don’t have other large recurring expenses, such as loan payments, Mohamed said.
She advises renters to create a detailed budget of their monthly expenses, but to also include what they’d like to be setting aside for savings and/or investments. This can help them determine how much is left over for housing costs.

‘We can’t throw our hands up’

Too many people, especially in expensive cities, decide that finding an affordable rent is unrealistic and then end up spending way too much, Sethi said.
“We can’t throw our hands up at the biggest expense of all,” he said. “We have to develop a real strategy for handling it.”

Ideally, Sethi said, people should aim to spend no more than 28% of their gross income on their rent costs. (These include, he added, utilities, furniture, repairs, etc.)
“If you have no debt, you can stretch the number a bit,” he said. In certain expensive cities, Sethi added, “they might spend 30%, 32%, even 35%.”
However, he cautioned, “above that, you’re exposing yourself to serious risk” in the event you lose your job or experience another setback.

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