If you’re anything like me and the other 43 million student loan borrowers you are about to receive a budget pinch come the first of October. We’re not here to argue the merits of this case, just to give you an idea of the possible effects debt payment resumption might have on the economy in general. The scope is as broad as leading to a housing recession to virtually no effect at all. I have skin in the game so I can attest to the tightening of the belt.
So how did we get here? Since March 2020, payments and interest accrual for federal student loans have been paused in response to the pandemic. My son and I, like many, grew accustomed to this new found life without loan over the past three years. On Sept. 1, interest began accruing again on federal student loans, and in October, the first required monthly payments will come due for the first time in 3 1/2 years.
What is certain is that these 40 million borrowers and others will have an additional budget expense next month. When federal student loan payments resume this fall, they are expected to pull as much $71 billion in otherwise disposable income out of the economy every year, $5.3 billion of which will come from Arizona alone. According to Cody Hounanian, executive director of the Student Debt Crisis Center, “We hear from borrowers, some even in Arizona, who are telling us that when payments restart, they’re not going to be able to afford food, they’re not going to be able to afford rent, they’re not going to be able to afford health care.”
The answer to the first question then is yes, a microeconomic section of the population will certainly be effected by loan repayment. It’s obviously a youth-centric debt, with younger people feeling the pinch. According to Rawley Heimer, an economics professor at the Carey School at Arizona State University, “The Supreme Court’s rejection of Biden’s debt-relief plan is particularly impactful for younger individuals, who have not benefited from a lot of the government policies that have been in place for many years that have allowed older generations to build wealth, like mortgage income tax deductions.” Hounanian pointed to a June Consumer Financial Protection Bureau survey that found roughly one student debt holder in five has risk factors that suggest they will struggle when payments resume. That includes an increase of 24% in other monthly debt payments since the start of the pandemic.
One are to watch in particular is the real estate rental market. In a study by Moody’s Analytics, as many as 22 million borrowers will need to resume making payments of close to $275 a month. “This will be a major financial shock and additional burden to younger renters or millennials, especially those in the low and moderate income group who are rent burdened.” On average, a medium income household spends roughly 30% on renting an apartment in the U.S. Taking $275 out of the monthly budget may force families on the margin to trade down in order to restore lost wages that are now having to be allocated for student loan payments.
While savings rates where uncharacteristically high in 2020 and 2021 due to pandemic relief, personal savings rates are now at the lowest levels since the Great Recession, with personal savings as a percentage of disposable income at just 4.6%
It’s not just the real estate rental market that comes into play, but the rising possibility of delinquencies across multiple types of debt. According to a new working paper from the National Bureau of Economic Research, “Borrowers on a student loan payment pause sharply increased mortgage, auto and credit card borrowing.” Overall, those balances were 10% higher by the first quarter of 2023. And it wasn’t just on credit cards that balances grew. Total debt balances grew by 19% from 2020 to 2023, compared to only 12% from 2017 to 2020.
The draconian economic scenario beyond its micro effect was touted by many prior to the date of loan repayments starting. Financial firm Jefferies referred to payments restarting as a “student loan cliff” earlier this spring. Mark Zandi, chief economist at Moody’s Analytics, argued in June that the return of student payments couldn’t come at a worse time, as the overall economy looked like it was on a path to a recession following the banking crisis and the fight over the debt ceiling. However, as we’ve seen to date, the macro economy has proven resilient, with a grower number of financial prognosticators saying that a recession this year is unlikely.
Echoing the sentiment of the majority currently, Dean Baker, founder and senior economist at the Center for Economic and Policy Research states, “I actually don’t think the end of the payments moratorium will have a very visible effect.” So all in all the net effect to the economy should be small. In a $25 trillion economy, the estimated $70 billion that could be associated with loan repayment only represents about 0.3%. What we are really looking at is a redistribution of income, whereby funds now spent of student loan repayments would have been alternatively spent, as mentioned, on things like homes, cars, etc. I think the better question is, now that the court has ruled against this relief, why do students need loans in the first place? Wouldn’t it be better to cost cut our higher education system by reducing bloated bureaucracies, tapping unused endowments, and placing a greater emphasis on cheaper online education? Food for thought.
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