Though talk of a recession has been in the air for over a year, the downturn hasnt quite materialized in the U.S. But that could all change in a few months, when 45 million-plus borrowers are once again on the hook to make their federal student loan payments.
The bills wont just hit household budgets hard. The broader U.S. economy will suffer as tens of millions of people have hundredsif not thousandsof dollars less to spend each month, according to economists and other financial experts.
While some analysts predict the end of the payment pause will have a modest effect on spending, others say it will add more financial strain to households that cant afford it.
Ive been expecting that were going to get a recession towards the second half of this year for a long time now, Thomas Simmons, U.S. economist at Jefferies, told Yahoo Finance Live. And the student loan issue just kind of compounds issues that I think are already sort of set in place.
Simmons previously warned of a coming student loan cliff. Federal student loan payments will cost an estimated 45 million borrowers around $18 billion per month, with the average household with loans owing just under $400. Thats a stretch for many given the impact persistent inflation and rising interest rates have already had.
Credit card debt is already increasing as costs have risen, and many households have spent down the savings they accrued at the beginning of the COVID-19 pandemic. Housing costs have also risen dramatically over the past year, and many households are already looking for ways to pare back their spending.
Borrowers reducing spending in other areas to pay their loans could reduce economic growth in terms of gross domestic product by a couple of tenths of a percent, said Mark Zandi, chief economist at Moodys Analytics.
In a more typical time, thats not really that big a deal, Zandi said on CNBC last month. The economy can digest that gracefully. But in the current environment where the economy is weak as it is, recession risks as high as they are, a couple of tenths of a percent can matter.
Renters, lower-income households, and younger borrowers are more likely to feel financial pressure now, according to Moodys, and the expiration of the student loan moratorium will further compound pressures on younger borrowers.
Federal student loan payments have been suspended for more than three years since the pandemic began. They will restart in October, with interest beginning to accrue once again in September, the U.S. Department of Education recently announced.
The one-time debt forgiveness program announced by President Joe Biden last year would have forgiven a large part of that debt, and eased many borrowers back into repayment. But the future of that plan is up in the air, with the U.S. Supreme Court set to rule on its legality in the coming weeks. Many experts predict the conservative court will block the plan.
We know that about half of the borrowers who were eligible for the relief would see their entire debt balances wiped out, says Persis Yu, deputy executive director of the Student Borrower Protection Center. Many federal borrowers would qualify for between $10,000 to $20,000 in debt forgiveness. It would be so much easier to restart payments with half the number of student loan borrowers.
If payments resume without cancelation, Yu says can there will be a tremendous increase in defaults and forbearance.
There absolutely must be a plan to avoid the economic devastation, she says. Other outlets have reported the Education Department is considering measures to help borrowers transition back to repaying their monthly student loan bills, including offering a grace period for the first few months.
That could help cash-strapped households, at least for a few months. A February survey from Credit Karma found that more than half of student loan borrowers say their financial stability depends on not making payments.
