By Joyce Beebe, Ph.D.
Fellow in Public Finance
Students in the class of 2020 have had a very different senior year college experience. Their time on campus has been cut short, their commencement has either been cancelled or will be held virtually, and their job searches are likely interrupted by the Covid-19 pandemic. For recent graduates, this is also not the best time to be the newest hire or the least experienced person at work. These young adults’ short tenure usually make them vulnerable to widespread headcount reductions.
On March 27, the federal government promptly passed the third legislative relief package, the Coronavirus Aid, Relief and Economic Security (CARES) Act, to stimulate the economy and help workers. What are the most relevant provisions in the CARES Act that benefit newly minted college graduates?
The most direct benefit in the CARES Act is the one-time $1,200 payment that will be sent to taxpayers. If an individual has filed a tax return in 2018 or 2019 and meets the income thresholds, the payment is largely automatic. The provision specifies that one will qualify for the full rebate if his or her adjusted gross income (AGI) is less than $75,000; the benefit then gradually declines and fully phases out at AGIs of $99,000 or more. Given that the median annual earnings of college graduates between 25 and 34 years old was about $52,000 in 2017, the majority of graduates will benefit from this rebate. However, if a young adult or a college student was claimed as a dependent by his or her parents, he or she will not qualify for the rebate.
Student Loan Payment Relief
Another key provision is the suspension of federal student loan payments from mid-March to September 30, 2020, which provides temporary relief to young workers with eligible student loan balances. However, the suspension may not benefit current seniors for the full six-month period, because student loan repayments generally do not start until after graduation.
In large part, the federal government’s student loan payment relief reflects the unfortunate reality that half of the current $1.5 trillion student loan balance was accumulated after the great recession. Over the last decade, student loans have been the second largest form of household debt for American families, only behind mortgages.
The Department of Education advises that, despite the forbearance period, borrowers who are less financially affected should continue to make payments because all repayments will be applied to the principal due to the suspension of interest. However, this advice may not apply to participants in the public service loan forgiveness (PSLF) program, which allows borrowers who work for a government or not-for-profit organization to receive loan forgiveness after 10 years of repayment. These participants will receive credits toward PSLF during the period of suspension, but they are unlikely to make any payments with their own funds — and because participants can only receive one credit per month, additional payments will not allow them to qualify for PSLF sooner.
The CARES Act also expands employer provided education assistance to include student loan repayments. In other words, if an employer pays down an employee’s student loan balance of up to $5,250 before January 1, 2021, the amount will not be counted as part of the employee’s income. The effectiveness of this provision remains to be seen, because employers have shown slow and sporadic interest in adding student loan repayment as an employee benefit even during economic expansion. In the midst of the pandemic, it is uncertain how many cash-strained employers will be able to provide this benefit.
Federal Pandemic Unemployment Compensation
In the unfortunate case that a young worker is laid off or furloughed, the CARES Act adds a $600 per week federal unemployment benefit for four months, until the end of July. The CARES Act also expands the eligibility of unemployment benefits to independent contractors such as gig economy workers and freelancers, as long as the Covid-19 pandemic is responsible for the individual’s loss of work or substantial reduction of work hours.
The $600 is provided in addition to the unemployment benefits a worker receives from the state and is especially helpful for young workers not only because it is a sizable amount, but also because state unemployment benefits are typically based on the worker’s past earnings. Because young workers’ earnings are usually lower compared to workers with extensive work history, their state unemployment benefit amounts are lower. In Texas, for example, the weekly benefit amount is between $69 and $521, depending on the worker’s wage history.
However, although some policymakers acknowledge that laid-off workers need assistance and that extra funds do provide financial cushions for them to comply with shelter-in-place orders, they are concerned that the generous benefit amount may cause individuals to be disincentivized when looking for work. Certain lawmakers caution that the total unemployment benefits a worker is entitled to may exceed his or her wages while working. Although the end results remain to be seen, workers may decide to leave their jobs and collect benefits instead of staying employed.
Retirement Plan Related Relief
Another provision that provides liquidity to young workers involves withdrawing from one’s retirement accounts. The CARES Act allows workers affected by Covid-19 to withdraw up to $100,000 from their employer sponsored retirement plans, such as 401(k)s or their Individual Retirement Accounts (IRAs), without paying the 10% early distribution penalty. The withdrawals are still subject to tax, but the CARES Act allows the resulting tax to be paid over a three-year period. The distribution can also be repaid over a three-year period without additional tax consequences.
In addition, certain employer sponsored retirement plans allow loans to plan participants. The CARES Act authorizes increased loan amounts (the lesser of $100,000 or 100% of the vested benefit) and permits longer loan repayment periods (up to six years).
Although these provisions provide liquidity, they are less likely to offer significant assistance to recent graduates primarily because their retirement account balances are limited. For young adults who take money from their retirement accounts, it is important not to view these withdrawals as “free cash;” instead, they should take a disciplined approach to repay the amount they withdrew in full within a specified timeline.
Future Unemployment and Underemployment Trends
Researches have shown that the labor market consequences of graduating from college during a recession are large, negative and persistent. Some studies also found the unfavorable labor market entry conditions have a lot to do with college graduates’ first employers. One study attributed half of this persistent reduction in earnings to graduates’ initial job placements in less attractive, lower paying positions.
However, the negative impact on wages is not evenly distributed, and a large portion of the wage catch-up process following initial employment occurs by switching to higher paying jobs. On average, it takes students who graduate into a recession 10 years to catch up. But graduates at the top of the wage distribution catch up in earnings with other cohorts within two to four years. Top graduates also move away from the initial lower paying employers faster than individuals at the lower end of the wage distribution.
Although there is considerable debate about the trajectory of economic recovery (L-shaped, U-shaped, or V-shaped), researchers generally agree the speed of recovery depends heavily on the effectiveness of social distancing and lockdown measures, and the recovery will be business sector-specific. What is certain is that governments around the world have been taking unprecedented measures in fiscal and monetary policies to stimulate their economies and to protect their workers; the CARES Act also includes provisions that incentivize employers to retain workers on payroll, an important element for quick recovery.
The moral of the story is that new graduates should not lose hope — there is no winner in the current pandemic. However, as long as one continues to strive for one’s best, the cream always rises to the top – hopefully faster this time.
The author would like to dedicate this article to her hardworking spring 2020 students.