Possible program impacts from US loan default.

The Looming Economic Crisis: What Could Happen if the U.S. Defaults on its Loans

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The United States is facing a potential economic crisis in June if Congress fails to raise the debt ceiling before the deadline. This could have a significant impact on many U.S. households and government programs. The U.S. reached its debt limit in January and will need to raise the debt ceiling or come up with an alternative solution by June to avoid defaulting on its loans for the first time in U.S. history.

It is not clear when the default would occur, but Treasury Secretary Janet Yellen put Congress on notice on Monday, reaffirming that it could occur as early as June 1. A default does not mean the federal money would never come, but that certain programs and benefits could be delayed. There is no blueprint for what exactly would happen in a default because the country has never experienced one.

What Could Happen if the U.S. Defaults on its Loans?

If an agreement is unable to be reached in time, here is a look at what government programs could be affected:

1. Social Security payments

   Approximately 66 million retirees, disabled workers, and other people rely on Social Security payments to fund portions of their lives. Almost two-thirds of beneficiaries rely on Social Security for half of their income, and 40% of recipients rely on the payments for at least 90% of their income, according to the National Committee to Preserve Social Security and Medicare. If the U.S. defaults on its loans, a portion of the checks could fail to roll out. However, a safeguard has been put in place that could help the Treasury send out payments through the program’s trust fund. But it’s not clear whether the amount would decrease or if the payments would be delayed.

2. Veteran benefits

   Another group that could be affected by the default is U.S. veterans and the $12 billion a month in benefit payments that are supposed to go out to them. Payments for those on disability, those who receive educational grants, healthcare for veterans and their families, and pensions could all be impacted by the looming crisis. Active military members could additionally see a delay in receiving their pay if the U.S. defaults.

3. Medicare/Medicaid

   A default could cause serious problems for federal healthcare programs if the government does not have the funds to pay for them. There are two major federal and state healthcare programs that could be impacted. Medicare is a federal program that consists of 65 million people in the U.S., which pays for healthcare for Americans age 65 and up and younger people with disabilities. Medicaid is a larger state and federal hybrid program that includes 93 million people nationwide. It helps provide insurance for low-income people, including children, disabled or pregnant people, and seniors.

4. School lunches and other government programs and benefits

   Another area that could take a hit due to a lack of federal funding is public schools, including their school lunch programs. Although the school year is largely wrapping up, schools could also lose out on billions of dollars for high-need students, special education services, and English-language instruction if the U.S. breaches the debt ceiling before July 1. Other programs that could be affected are housing assistance and SNAP food assistance.

5. Other possible effects of the default on U.S. households

   Because the default takes so much out of the U.S. government, the country’s credit rating would likely see a decrease as well. This could upset the U.S. economy and cause interest rates to spike, which would make it harder for ordinary people to borrow money. It could also impact the job market and cause an uptick in unemployment. But the amount of damage would depend on how long the default lasts for. If the default lasts for about a week, close to one million jobs would be lost, and the unemployment rate would jump to about 5%, according to Moody’s Analytics. However, if the default stretches into six weeks, the U.S. could reportedly see more than seven million jobs lost, and the unemployment rate could rise above 8%.

It is crucial for Congress to take action before the deadline to avoid the potential economic crisis that could have a devastating impact on many Americans. The U.S. government must find a way to raise the debt ceiling or come up with an alternative solution to ensure that government programs and benefits continue to be funded.

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