What the Debt Ceiling Bill Means for Your Personal Finances

The threat of an unprecedented U.S. government default has been defused, which saves millions of people’s jobs, savings, and investments from possible harm.

With just days left until the deadline, the U.S. Senate passed the debt ceiling bill on June 1, 63 to 36, following the House of Representatives’ May 31 vote already passing it.

The Fiscal Responsibility Act of 2023 , negotiated by President Joe Biden and House Speaker Kevin McCarthy, will impose cuts in federal spending.

President Biden is expected to sign the bill into law on Friday, June 2, thus suspending the debt limit until Jan. 1, 2025, in exchange for a cap on spending. Treasury Secretary Janet Yellen had set June 5 as the deadline for raising the debt ceiling, saying that otherwise the U.S. could be unable to pay all of its bills on time, in a default she described as “catastrophic.”

How Does the Debt Ceiling Bill Affect You?

The federal cuts in the bill do not touch Social Security, Medicare, veterans, or defense, but focus on “discretionary spending .” This includes education, transportation, income security, and homeland security.

Due to the bill, funding for domestic programs will not increase but will stay the same in 2024 – except for Social Security and Medicare, which might see small bumps due to inflation.

The bill will impact over 40 million federal student loan borrowers: The three-year-long pandemic-related federal loan pause in repayments will end, at the latest, 60 days after June 30, 2023. By law, after that point, payments must resume and interest will begin to accrue again.

“This bill does end the payment pause,” confirmed the Office of Management and Budget Director Shalanda Young in a May 30 press briefing . “But [it is] very close to the timeframe we were going to end it, as an administration, when it comes to repayment.”

The bill also includes such cuts as a $27 billion “clawback” on Covid-19 aid, money budgeted but not yet spent.

Also negotiated: new work requirements for some people who receive federal food aid and other government assistance. Current law requires most able-bodied adults between the ages of 18 and 49 without dependents to work or attend training programs if they want to receive benefits. The bill phases in a higher age limit for those work requirements, bringing the maximum age to 54. (This change exempts veterans and homeless people.)

The bill also includes up to $21.4 billion in Internal Revenue Service budget cuts, eliminating part of the funding enacted last year for taxpayer service, technology, and enforcement.

For many Americans, the most impactful aspect of the debt ceiling bill is quite simply avoiding the economic damage that would be unleashed if the government did not meet the deadline.

“The President made clear that default was not an option and laid out the economic stakes of a default: a recession, millions of jobs lost, devastated retirement accounts, higher borrowing costs,” said Press Secretary Karine Jean-Pierre.

In an earlier statement, the White House had also spelled out the risks: “An actual breach of the U.S. debt ceiling would likely cause severe damage to the U.S. economy.… If the U.S. government were to default on its obligations — whether to creditors, contractors, or citizens — the economy would quickly shift into reverse, with the depth of the losses a function of how long the breach lasted. A protracted default would likely lead to severe damage to the economy, with job growth swinging from its current pace of robust gains to losses numbering in the millions.”

The Pause on Federal Student Loan Payments Ends by September

Repayment of federal student loans was first suspended in March 2020 in the throes of the Covid-19 pandemic and economic lockdowns.

Following the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the U.S. Department of Education has allowed people with federal student loans to suspend payments on their debt, and interest did not accrue during the pause. The deadline to resume payments on federal student debt has been postponed nine times (three times by the Trump administration and six times by the Biden administration).

In November 2022, Biden extended the federal student loan pause to 60 days after the Supreme Court ruling on the legal challenges to debt forgiveness, or, if the legal questions have not been resolved, no later than June 30, 2023, which would bring the latest date to August 30. As Shalanda Young indicated, the Department of Education’s date is close to the same day as the deadline mandated in the debt ceiling bill.

The Federal Student Aid site says that once the payment pause ends, “you’ll receive your billing statement or other notice at least 21 days before your payment is due. This notice will include your payment amount and due date.”

In the meantime, federal loan holders can get an estimate of their payment amount and due date through their loan servicer .

In other student loan legislative news, the Senate has joined with the House of Representatives in passing a bill to block Biden’s federal student loan forgiveness program, which is intended to cancel up to $20,000 of debt for those who meet household income restrictions. However, Biden has already said he will veto this legislation should it come to his desk.

Neither the debt-ceiling bill ending the federal student loan pause nor the legislation attempting to block Biden’s federal loan forgiveness has any bearing on the student loan case before the Supreme Court. Earlier this year, Justices heard two challenges to Biden’s debt canceling program. Their ruling is expected to be released to the public before the end of June.

The Takeaway

The debt-ceiling bill, negotiated to prevent an unprecedented U.S. default, includes cuts in “discretionary” federal spending, such as reductions in the IRS budget, a higher age requirement for working in order to obtain government food assistance and other benefits, and a clawback of Covid-related assistance funding.

Another cut was obtained through mandating that the pause in federal student loan repayments come to an end no later than Aug. 30, 2023.

Student loan refinancing is one way holders of debt can seek to make student loan payments more manageable. If you want to lower your monthly payment, but your federal debt is potentially eligible for Biden’s one-time forgiveness program, you can refinance just the amount that will not be canceled. Remember that the refinanced amount will lose access to federal protections and programs and you may pay more in interest over the life of the loan.

Photo credit: iStock/miniseries

SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.

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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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