The COVID pause on student loan repayment is over. With 28 million borrowers now having to make payments again, will this slash consumption and take the US economy down with it? Probably not. The New York Fed analyzed some recent survey results and concluded that the impact would be minimal:
On average, borrowers expect to reduce consumption by around $56 per month from their average monthly spending reported in August. If we scale this monthly decline up to the 28 million borrowers with federally-managed loans currently in forbearance, this would suggest nearly a $1.6 billion decline in monthly spending, or 0.1 percentage point of August 2023 personal consumption expenditures (PCE).
Here's the expected impact on various demographic groups:
Oddly enough, two groups expect their spending to increase: non-whites and those without a BA. However, those may be statistical artifacts. The Fed's sample size was small and the error bars are large.
But their broad conclusion is probably fairly reliable: the end of the repayment pause will have only a tiny impact on the overall economy. And that comes straight from the borrowers themselves.
Two things.
First, people always underestimate this kind of thing. Optimism bias.
Second, even if it's true, in other words (given that the average payment is far more than $56/mo) people expect to go into debt by hundreds of dollars per month. That's bad, and will affect the economy.
Here's hoping they ask about finances after payments have resumed for a bit. There seems to be some optimism about the new income based repayment plan. I'm curious to know if that optimism is well placed. A lot also depends on how many people were preparing for the resumption months in advance. If people took advantage of the pause to reduce other debts and build a rainy day fund, they may be fine. If lifestyle creep set in, it could be rough.
Maybe they are counting on Biden's income based payment plans kicking in....
Income-based plans were already a thing. The new rules reduced the payments for most people, however.
And those new rules already kicked in.
This will be good for Bitcoin! /s For those of you who aren't familiar that's the standard response anytime there is bad news related to the crypto purchasing demographic. It's almost never true. I personally expect there will be some impact if the tech bros need to start repaying their loans.
Anyway, although student loan payments are resuming for some people (there are a lot of exceptions) there is a 1 year ramp up where not paying only accrues additional interest and has no penalties. If you have credit card debt the rational thing to do is to keep paying that down for the next year and skip the loan repayments. This doesn't seem to be covered in the mainstream financial press much but among the stonkers it is getting some press.
The press went gaga for debt forgiveness, largely because it was an easy story to tell and would rile up lots of angry opinions on both sides.
Most of the practical information about changes to student loans is buried pretty deep. The preference now is to frame everything as a horror story, even though having to brownbag lunch while earning $140,000 a year is not likely to inspire that much sympathy: https://www.vox.com/money/2023/10/6/23903808/student-loan-payments-debt-budget
Dean Baker
https://cepr.net/blog/dean-bakers-beat-the-press/
has more on how the repayment amounts will be limited.
Student loan repayment/the potential for loan forgiveness was an important motivating factor, for the under 35, Biden leery, demographic during the midterm election. Even if the macro level impact of returning to loan payments is small, potentially, the electoral consequence could be large....
My payment will be about $400. My vote doesn’t count because I live in a red state, and I would be voting against Trump anyway, but I am unhappy with Biden and the Democrats. They’ve been pretty much what I expected them to be.