Friday’s Supreme Court ruling on the constitutionality of President Biden’s student loan forgiveness could be unprecedented in its almost immediate impact on consumer finances. After the conservative court quashed the $430 billion donation, the US economy looks set to face recession head-on. Still, the S&P 500 rallied as the Fed’s key inflation rate eased amid slowing consumer spending.
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The stakes of the decision in Biden v. Nebraska are heightened by the impending end of the federal student loan repayment moratorium that has been in place since April 2020.
Student loan payments to reduce consumer spending
Deutsche Bank estimates that a resumption of student loan repayments will reduce consumer spending by up to $14 billion per month. That equates to $305 per borrower, analysts Gabriella Carbone and Krisztina Katai wrote on June 21. Interest will start accruing on student debt on September 1, with the first payments due in October.
Goldman Sachs estimates that personal consumption spending could face an average hit of six-tenths of a percentage point over the last four months of 2023. Had the Supreme Court allowed Biden’s student loan forgiveness plan, the slowdown in spending would have been reduced. half.
The White House had said its student loan forgiveness program would completely erase student debt for about 20 million borrowers. About 60% of the 43 million eligible for debt relief have received Pell Grants, making them eligible to erase $20,000 in student debt. Other borrowers could have had up to $10,000 of their student debt forgiven. Eligibility was to extend to those earning up to $125,000 a year, or $250,000 for couples.
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Supreme Court Student Loan Case
The Supreme Court’s decision hinged on two questions: Did Biden overstep his authority, and if so, did the Republican-led states have standing to sue? Recent rulings from the conservative-dominated court show little patience for government agencies adopting consequential policies without the express consent of Congress. This is why analysts felt that the issue of standing would be paramount.
The plaintiffs argued that Missouri’s finances could suffer if the state-created student loan service MOHELA lost revenue due to debt forgiveness. Conservative justices agreed, estimating the loan forgiveness could cost the agency $44 million a year in fees.
Impact of furloughs on student loan payments
A New York Fed study estimated that student borrowers saw $195 billion in canceled payments in the first two years of the moratorium. That sum has now probably grown to around $300 billion.
The student loan repayment holiday not only allowed borrowers to spend more freely, but allowed them to take on more debt. Yet now, even before a resumption of student loan repayments, Deutsche Bank notes a “sharp increase in credit card delinquency rates”, from 1.5% in the third quarter of 2023 to 2.4% in the last quarter. . Delinquencies remain well below the peak of around 6% triggered by the 2008 financial crisis.
The suspension of student loans is the latest major Covid-era government support for household finances. Stimulus checks, bloated unemployment benefits and expansive child tax credits are long gone. In the first quarter, the SNAP (Supplemental Nutrition Assistance Program) emergency benefits expired. This amounted to a hit of at least $95 per month for eligible households, or about $3 billion per month. Medicaid income limits, suspended at the start of the Covid pandemic, are now returning. That could eliminate up to 17 million people from the program over the next year, forcing them to find more expensive insurance coverage, according to analysis by the Kaiser Family Foundation.
The Fed’s key inflation rate cooled in May as spending slowed
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Even before the restart of student loan repayments, consumer spending is already running out of steam. Retail sales fell 0.1% in the three months to May from the previous three months, on a seasonally adjusted basis.
Spending on services, with the exception of an increase in health care, also appears to have slowed. “The recent stagnation in air passenger numbers and hotel occupancy, as well as declining restaurant diner numbers, suggest a degree of caution is creeping into consumers’ spending decisions,” Ian wrote. Shepherdson of Pantheon Macroeconomics.
Consumer caution, even more than a resumption of student loan repayments, is the real risk of recession in the United States. Savings as a percentage of disposable income hit a low of 2.7% last June, reaching 4.6% in May. But the savings rate is still just over half its pre-pandemic level of nearly 9%. A return to pre-pandemic levels could represent an annual spending drag of about $700 billion a year.
Wall Street economists have recently downplayed the odds of a recession, and the Federal Reserve seems to agree. New projections released this month show that the US economy is growing 1% this year, compared to a forecast of 0.4% in March. The Fed expects similarly tepid growth in 2024. Still, the Fed has signaled that it is not done raising interest rates as it strives to bring inflation down. Policymakers expect the unemployment rate to hit 4.1% this year and 4.5% in 2024, which could urge consumers to be cautious.
S&P 500 rallies
The S&P 500 rose 1.1% to 4,445 in Friday morning market action. That puts the S&P 500 on track for its highest close since April 2022.
Investors took inspiration from May’s personal income and spending report which showed the Fed’s key inflation rate declining somewhat. However, the same report also showed that consumer spending has slowed sharply, with inflation-adjusted spending flat in three of the past four months.
Still, the Fed looks almost certain to raise its benchmark interest rate on July 26. Another hike could take place at meetings in late September or early November. Given that the first student loan payments are not due until October, the economic data may not reflect much of an impact until very late this year.
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