When Student Loan Payments Resume, Households Will Feel the Pinch
Household budgets are going to face a shock later this year when student loan payments resume, according to Jefferies.
After a three-year pause in required payments, borrowers with federal loans will soon face monthly bills again. That presents risks similar to the effects of the 2013 fiscal cliff, when tax increases led to reduced consumer spending, Jefferies money market economist Thomas Simons wrote in a note.
“It is very likely that most households that were previously making student loan payments have not been saving the extra money or including the payments in their budgets,” he wrote. “Households still have roughly half of the excess savings from the pandemic sitting on their balance sheets, but there is less cushion to absorb a substantial increase in outlays.”
The student loan restart date hinges on legal challenges to President Joe Biden’s forgiveness plan. The Supreme Court heard oral arguments last month in two cases challenging the program, which would forgive up to $20,000 in federal loans per borrower.
Payments are set to resume 60 days after the Supreme Court issues its opinion or June 30, whichever comes first. That puts the restart date at no later than Aug. 29, and the first monthly installment would be due by the end of September.
An additional lawsuit, brought by private lender SoFi against the Department of Education, is attempting to overturn the current payment freeze on the basis that its 0% interest rate is harming SoFi’s reservicing business.
The average monthly student loan payment prior to the pandemic was $393, according to the Federal Reserve. Collectively, those payments translate to about 0.6% of personal income and 0.8% of monthly personal consumption expenditures, according to Jefferies. That’s similar to the impact of the tax increases associated with the fiscal cliff, “which was followed by a noticeable slowdown in consumption.”
And although delinquency rates on debt are still below pre-pandemic levels, the student loan moratorium could be skewing the measurement, since households haven’t been burdened by that monthly bill. Without the pause, those delinquencies would almost certainly be higher by now, according to Jefferies.
“Risks have clearly increased over the last month, and they will increase further as household credit quality deteriorates,” Simons said.