How the resumption of student loan bills could shake the US economy

Staff Reporter:     

The pandemic-era pause on federal student loan payments ends Sunday, leaving as many as 40 million Americans on the hook for a new monthly bill they havent needed to make in more than three years.
Economists caution that the impact on households and the economy remains largely uncertain, as there is little precedent for borrowers getting such a long break from their loan bills, according to CNBC news network.
American households will get their first bills during an especially volatile period, with the highest interest rates in decades, workers on strike across the country and a looming government shutdown, CNBC added.
“The economy will struggle in the fourth quarter, in meaningful part due to the end of the student loan payment moratorium,” said Mark Zandi, chief economist at Moodys Analytics
Financial services firm Jefferies is warning that “there could be a significant risk to consumer spending ahead,” because of the resumption of student loan payments. It recently surveyed about 600 consumers with student debt, finding that half of borrowers are “very concerned” about meeting all of their expenses.
Around 70% of borrowers plan to postpone big-ticket purchases come October, its poll found. Meanwhile, many people with student debt plan to cut back their spending on clothing, travel and food, according to the network.
“As we go into the holiday season, this will be an extra drag on retail spending,” CNBC quoted Brett House, a professor at Columbia Business School, as saying.
President Joe Biden’s administration had hoped to ease the transition back to loan payments by forgiving up to $20,000 in student debt for many borrowers, but the Supreme Court blocked that policy in June.
Chief Justice John Roberts said the government needed direct authorization from Congress before attempting to erase an estimated $430 billion of federal student loan principal.
The Biden administration announced on Friday the next step in its new plan to cancel people’s student debt after the Supreme Court struck down its original policy in June, but its expected to be a lengthy process.
The US Department of Education released its initial agenda of policy considerations for its second attempt at delivering Americans student loan relief. It also shared a list of individuals who will serve on the “Student Loan Debt Relief Committee.”
The Biden administration will focus on certain groups of borrowers in its new plan, including those suffering from financial hardship or who entered in repayment decades ago.
Scott Mushkin, founder and CEO of R5 Capital, a consumer research consulting firm, estimates that starting in October, around $7 billion to $8 billion per month will be reallocated to student loan payments.
“Its definitely a challenge,” Mushkin said, pointing out that retailers that cater to educated consumers are most at risk.
Macys CEO Jeff Gennette mentioned student loans in the companys earnings call in August.
“I think there are some headwinds coming, particularly with student loans, that expiration of the loan forgiveness,” Gennette said.
Many student loan borrowers have taken on additional debt during the payment pause, according to a recent study by the credit reporting company, which means additional monthly payments, that may pose added challenges.
The typical student loan bill is around $350 a month, but at least 10% of borrowers have a payment of over $700.
The Consumer Financial Protection Bureau (CFPB) has also found that student loan borrowers have fallen deeper into debt during the pandemic, with more than half of borrowers holding higher monthly debt-related expenses than they did before the pause on bills began in March 2020
More than 1 in 13 borrowers are currently behind on their other payment obligations, the CFPB says.
“These borrowers might be unable to make payments on their student loans if they are already missing payments on their credit cards or auto loans,” Kentia Elbaum, a spokesperson for the CFPB, said in a previous interview.
The total student debt has more than tripled over the past 15 years, rising from about $500 billion in 2007 to $1.7 trillion today.

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