By Michael S. Derby and Dan Burns
(Reuters) – The U.S. Supreme Court’s overturning of President Joe Biden’s student loan forgiveness plan puts nearly half a trillion dollars of debt back on household balance sheets, a burden that will adds to the end of a pandemic-era pause in student loan payments could accelerate an economic slowdown expected later this year.
Friday’s 6-3 court ruling, widely believed to go against Biden, comes just weeks after the White House and congressional Republicans reached a deal to lift the federal debt ceiling that included the ban. of any new extension of the suspension of the payment of the student debt put in place. early 2020 at the onset of the COVID-19 pandemic. The Department of Education said last week that loan repayments would resume in October.
That means American households that collectively owe $1.6 trillion in education debt must start paying back hundreds of dollars a month for the first time in more than three years. A New York Fed study from earlier this year found that about $440 billion in loans were eligible for relief and that if they were permanently eliminated, 40% of student borrowers would be debt free. student loan.
Economists expect the restarted payments to have a significant effect on consumer spending, but their views vary on how severe the pain will be.
So far, consumer purchasing power has defied mainstream expectations of a sharp decline in the face of the sharp hike in interest rates designed by the Federal Reserve to contain inflation. In the 12 months to May, consumer spending grew at an annualized rate of 5.9%, nearly 2 percentage points above the pre-pandemic growth rate.
But questions remain about the resilience of consumer spending, a key driver of economic growth, especially with the prospect of further rate hikes remaining on the table.
“I anticipated a pretty big impact on consumer spending as soon as payments resume,” said Thomas Simons, U.S. economist at investment bank Jefferies. “I suspect most people who are going to have to start paying again have limited ability to manage the increased expenses” while facing other financial challenges.
“I expect this to be the tipping point that pushes the economy into a recession,” Simons warned.
Morgan Stanley economists, meanwhile, predict that the retaxation of loan repayments will have a tangible — but modest — impact on growth in the final months of the year. Unlike Jefferies, the bank does not foresee a recession in the United States, but agrees that personal spending will suffer and that the country’s gross domestic product growth will probably be 6 to 9 basis points lower than it would be. otherwise.
Morgan Stanley noted that the typical monthly interest payment that would be expected to be made would range from $200 to $300, meaning those affected are likely to see their disposable income reduced by 0.3% to 0.5% each year per year. compared to what they would have been had student loan forbearance remained in place.
CARRY THE BURDEN
That said, there remains great uncertainty as to how all of this will play out and how it will manifest in the economy. That partly depends on how the Biden administration handles the aftermath of the decision.
Who will bear the burden of restarted payments is somewhat in the running. Some economists who opposed the moratorium on loan repayments had seen the effort as a gift to well-to-do Americans, saying the high loan levels were a sound investment to bolster future incomes.
But New York Fed researchers have pushed back on that notion, and the bank’s analysis over the past few months suggests restarting payments will weigh most on those who may struggle to cope.
A New York Fed article from January noted that those who would benefit the most from the suspension of debt repayment were “younger, have lower credit scores and live in lower-income neighborhoods.” He said some student borrowers struggling to manage their credit card and car loan debt “could portend more widespread payment difficulties for borrowers if payments resume without relief.”
Another challenge for at least some of those facing student loan repayment: managing new debt incurred when student loan repayments were no longer on the table. The New York Fed found that the debt payment suspension had boosted the credit scores of student borrowers, opening the door to further debt.
Indeed, an article published earlier this year by the University of Chicago noted that, on the whole, those who benefited from the moratorium were not using the extra money to pay off existing loans and were instead spending what was available. turned out to be a temporary boon, with some of that spending fueled by debt.
Student loan delinquency rates fell from around 10% before the payment holiday to less than 1% at the end of the first quarter of this year. A White House official said the administration is concerned about the ability of some borrowers to repay their loans and that there are very good reasons to be concerned about delinquencies and defaults.
A Fed study, released in May, suggests that a return to loan repayments could lead to some strain on credit, noting that those who received the relief “were able to improve their credit profile.”
(Reporting by Michael S. Derby and Dan Burns; Editing by Andrea Ricci)