As the American economy faces challenges of high inflation and interest rates, the resumption of student loan payments presents yet another potential obstacle.
The suspension of federal student loan payments, which began during the peak of the pandemic in 2020, will come to an end later this summer.
Starting in September, interest will again start accruing, and payments will resume in October.
Many individuals had hoped for some relief, but the Supreme Court recently invalidated a Biden administration plan that aimed to provide some respite to millions of borrowers.
The plan sought to cancel up to $20,000 in federal student loans for 43 million borrowers, with complete loan erasure for 20 million individuals. However, the court ruled that the plan exceeded the government’s authority.
The resumption of student loan payments will require many individuals to allocate a significant portion of their monthly income towards loan repayment, money that had been previously spent on other goods and services over the past three years.
While the reduction in spending is unlikely to have a substantial impact on the $26 trillion U.S. economy as a whole, specific industries may experience the effects more noticeably.
E-commerce companies, bars and restaurants, and certain major retailers are expected to be among the most affected.
Although this pullback in spending may not significantly weaken overall economic growth, the change in spending patterns by young adults could introduce further uncertainty into an already uncertain economy.
This uncertainty encompasses various factors, ranging from the Federal Reserve’s ability to control inflation and halt interest rate hikes, to concerns over a potential recession by next year as feared by many economists.
Josh Bivens, chief economist at the Economic Policy Institute, believes that the impact of the ending pandemic relief programs on the economy will be significant but not drastic.
He estimates that the hit to the economy could amount to about one-third of a percentage point of gross domestic product, which is roughly $85 billion to $90 billion per year. While this is not an insignificant amount, Bivens does not believe it will be a game-changer at the macro level.
Despite rising interest rates, consumers have continued to spend, contributing to the economy’s resilience.
This can be attributed in part to the government’s stimulus spending of around $5 trillion since 2020 to mitigate the economic effects of the COVID-19 pandemic.
However, as these relief programs, including the student loan moratorium, come to an end, the economy will face additional challenges.
Neil Saunders, managing director of GlobalData Retail consultancy, suggests that the temporary suspension of loan payments has provided consumers with extra disposable income, which has prompted increased spending.
However, Deutsche Bank analysts project that the resumption of loan payments could result in a decrease in consumer spending of around $14 billion per month, equating to an average reduction of $305 per borrower.
They anticipate that online commerce, mail-order companies, restaurants, and bars will be the hardest hit.
Deutsche Bank’s analysis also points out that individual companies such as Macy’s, Target, and Kohl’s are likely to experience negative effects.
However, Walmart, being the largest retailer and having a significant presence in the grocery sector, is expected to be less affected by these changes.
Dollar stores and other discount retailers may actually benefit from the ending of the student loan moratorium as financially constrained consumers turn to bargain-hunting.
This could drive increased business for these types of stores.
According to Jan Hatzius, chief economist at Goldman Sachs, the end of the student loan moratorium is expected to have a “modest drag” on the economy, resulting in a 0.2% reduction in consumer spending growth this year.
However, Hatzius suggests that if the Supreme Court had allowed the Biden debt forgiveness program to proceed, the impact on spending would have been half as significant.
The economy has experienced significant fluctuations since the onset of the COVID-19 pandemic in early 2020. Following a severe recession in March and April of that year, substantial government aid has fueled a surprisingly quick, strong, and resilient recovery.
The surge in consumer demand following the COVID-19 pandemic led to significant disruptions in global supply chains, resulting in delays, shortages, and higher prices. This surge in inflation reached levels not seen since the early 1980s.
To address this inflationary pressure, the Federal Reserve began raising its benchmark short-term rate in March 2022. Since then, it has increased its key rate 10 times. This has effectively slowed down the economy and curbed price acceleration.
Consumer price inflation, which peaked at 9.1% in June 2022, had fallen to 4% in May. However, this is still double the Federal Reserve’s 2% target. As a result, the central bank has indicated that further rate hikes are likely this year.
Simultaneously, the government has been phasing out pandemic relief measures. Extended unemployment aid ended in September 2021, and an expansion of the food stamps program concluded this year.
The savings that Americans accumulated during the peak of the pandemic, when they received government relief checks and saved money while staying at home, are now diminishing.
Federal Reserve researchers have suggested that any surplus pandemic savings likely dried up in the first quarter of 2023.
Despite the challenges, the economy has demonstrated unexpected resilience. The government recently revised its estimate of economic growth from January to March to a 2% annual rate and reported that consumers were spending at their fastest pace in nearly two years.
Additionally, the job market remains robust, with employers hiring at a brisk pace, and unemployment hovering at a low rate of 3.7%, which is just slightly above a half-century low.
These positive factors have consistently surpassed predictions made over a year ago that a recession was inevitable.
Josh Bivens suggests that the economy has demonstrated considerable strength and has weathered a variety of challenges, leading him to believe that the resumption of loan payments may not be significant enough to cause a downturn.
He believes that there would need to be a more significant event to trigger a negative impact on the economy.
Despite the economy’s resilience thus far, Josh Bivens has concerns about the potential impact of Federal Reserve rate hikes and federal cutbacks, such as the end of the student loan payment moratorium.
He worries that these actions could introduce contractionary shocks to the American economy, which has managed to surpass expectations thus far.
While the economy has been able to overcome various challenges, Bivens suggests that these factors could pose a risk and potentially disrupt the current positive trajectory.