Prepare for Economic Headwinds

According to data from Experian, there are currently 45 million people in the U.S. burdened with student-loan debt, which amounts to a staggering $1.7 trillion. Experts caution that these loans will create a significant spending squeeze for borrowers, particularly younger Americans.

Torsten Sløk, chief economist and partner at Apollo Global Management, predicts that resuming student loan payments in October will lead to a monthly reduction of approximately $9 billion in consumer spending, totaling around $100 billion annually. This impact will primarily affect younger households. The Education Data Initiative reveals that approximately 6% of federal student-loan debt is carried by adults under 25, while adults aged 25 to 34 hold 30%, and those aged 35 to 49 account for nearly 39%.

Student-loan payments had been paused for over two years due to the COVID-19 pandemic but will now resume this fall. President Biden’s debt-forgiveness plan, which aimed to cancel up to $10,000 in federal loan debt for borrowers earning less than $125,000 per year, was struck down by the Supreme Court. Democrats argued that forgiveness would benefit the most vulnerable borrowers, while Republicans expressed concerns about the burden on taxpayers. Economists have also questioned the wisdom and effectiveness of Biden’s plan.

Starting from September 1, interest on federal student loans will begin accumulating, and the first payment after the moratorium is lifted will be due in October.

Anticipating an Increase in Delinquencies

Economists and analysts are worried about the potential consequences of resuming student-loan payments on the economy, particularly its impact on consumer spending and household finances.

The Potential Impact of Resuming Student Loan Payments

As the postponed student loan payments are set to resume, experts are predicting the possibility of increased delinquencies on other forms of household debt. While the payment pause allowed many individuals to pay off credit card debt and save money, there are concerns about the potential consequences once payments restart.

Economists at Bank of America reported that although consumers have been making efforts to repay their debts and delinquencies have remained relatively low for now, there has been a continuous rise in the number of late auto loan payments and credit card delinquencies. In fact, the proportion of people seriously delinquent on their loans, where debt is over 90 days late, has surpassed pre-pandemic levels.

Bank of America anticipates that if student loan payments fully resume, serious delinquencies could increase by approximately 67% over time. This rise in delinquencies could have ripple effects on other forms of household debt as well.

According to the Consumer Financial Protection Bureau, more than 1 in 13 borrowers with student loan debt are currently behind on their other payment obligations. This highlights the financial strain that many individuals face, even beyond their student loans.

While the resumption of student loan payments may pose challenges for many individuals, it is encouraging to see ongoing efforts to find solutions and alleviate the burden of student debt in the United States.

• Inside the room where Biden administration officials and college leaders game planned college admissions after affirmative action

• Biden administration to cancel $130 million in student debt for borrowers who say they were scammed by their school

• If you’re part of the 1%, you’re twice as likely to attend an elite college, new research finds