Student loan payments have little economic impact after the pandemic pauses

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The resumption of student loan payments this fall was expected to be a deterrent to an economy facing a severe recession and recession next year.

This is not least because many borrowers, who owe a total of $1 trillion, have defaulted in the middle of a one-year term. Others are taking advantage of the Biden administration's income-based payments and loan forgiveness programs.

„It's a drag (on the economy) and a small factor that helps avoid a recession,” says Nancy Vanden Houten, an economist at Oxford Economics.

Why Are Student Loans Suspended?

Congress suspended federal student loan payments in 2020 due to the Covid-induced recession, giving Americans an extra $260 billion to help pay bills and boost the economy.

But the 3½-year moratorium ended in October, with 22 million borrowers scheduled to make payments that month and 6 million more to join them in the fall.

The payments are projected to total up to $9 billion a month, reducing consumer spending by the same amount, Van Houten says. With consumption accounting for about 70% of economic activity, he calculated that money would siphon off three-tenths of economic growth by 2024. This would add 240,000 fewer jobs to the labor market.

For an economy expected to grow 1% or less next year, student loans — along with pandemic-related family savings, record credit card debt and even higher interest rates and inflation — may be enough to tip the scales. Some economists and business leaders say the nation is in decline.

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„Upcoming student loan repayments will put additional pressure on the already strained budgets of millions of families,” Target CFO Michael Fidelke told analysts in August.

So far, the impact on the economy appears to be much milder than feared.

How much is the total student loan amount per month?

According to the Treasury Department and Oxford, student loan payments increased from $1.2 billion in July to $6 billion to $7 billion each month from August to October. But Van Houten suspects that the main reason for this is that some borrowers decided to pay down their principal to cushion the impact of higher interest rates.

In November, student loan payments totaled $5.3 billion and averaged $1.2 billion a week, or a pace of $4.8 billion a month, so far in December, Treasury data show. Van Houten estimated they would settle for about $5 billion a month and cut economic growth by one-tenth to two-tenth of a percentage point next year — much less than the $9 billion economy he initially predicted.

Over the past two months, economists have lowered their estimates of the impact of debt payments, but the actual decline is still limited.

Several reports show that many borrowers are still weighing their options instead of paying off their student loan bills.

How many student loan borrowers default?

In October, only 60% of the 22 million borrowers had made payments, the Education Department said. blog On December 15. That means 40%, or about 9 million borrowers, missed payments, including those already in default or receiving deferment or forbearance. That's a much larger share than the average of 16% of borrowers before the pandemic, he says. Mark Kantrowitz, student loan expert and teacher And how to apply for college financial aid.

Kantrowitz said he always expected the economic impact of the payments to be small, but because so many people still don't pay, it's turning out to be more normal than he expected.

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In a blog post earlier this month, Under Secretary of Education James Quall suggested that many borrowers are struggling to cope with the end of the payment freeze.

„While most borrowers have already made their first payment, others will need more time,” he wrote. „Some people are confused about their options or overwhelmed. We want to let borrowers know that our priority is to support student loan borrowers as they repay them.

In New York life Census Of the 402 student loan borrowers in September, 27% said they weren't sure how they would repay their loans after suspension. Another 23% said they were cutting back on „lifestyle expenses,” such as eating out and concerts.

Another survey by Sargana, which studies consumer behavior, found that 9% of borrowers plan to continue defaulting, 10% are waiting for future news about government schemes and 10% don't know what to do.

„This keeps people from paying more,” Marshall Cohen, Circana's chief retail analyst, wrote in an email, at least for a while. „That means $3-4 billion a month is avoided from being pulled back from discretionary spending.”

However, before the moratorium on student loan payments, the obligations were only 0.4% of the nation's GDP, Kantrowitz says.

„It's a small percentage of GDP,” he says. „It's not enough to cause an earthquake in the economy.”

Is consumer spending rising or falling?

Meanwhile, consumers continue to spend at a healthy clip. Retail sales rebounded last month after flagging in October.

Here are alternatives the Biden administration is offering student loan borrowers that reduce payments and their effect on the economy:

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grace period

A 12-month „on-ramp” allows borrowers to defer payments until next September. They will not be subject to default and their failure to pay in the meantime will not affect their credit score. But loans continue to accrue interest.

That means many additional student loan payments will resume by September, but the impact on the economy will be softened as it spreads over time.

Income based payment plans

The Biden administration's new income-based payment program, called SAVE (Savings on Value Education), is more generous than similar programs and 5.5 million borrowers are now enrolled, according to the Education Department.

Borrowers can pay just 10% of their disposable income, which will drop to 5% in July, down from an average of 12% under other income-based programs, Kantrowitz says. Also, single borrowers earning less than $32,800 and families of four earning less than $67,000 do not pay, which have higher income limits than other similar programs. Of the 5.5 million borrowers registered with SAVE, 2.9 million have made zero payments.

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Debt cancellation

The Department of Education has canceled about $132 million in loans to 3.6 million borrowers, more than any other president. Loan waived off for public sector employees and borrowers who have made payments for at least 20 years.

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