WASHINGTON (AP) — The respite has come to an end. At a time when the American economy is grappling with soaring inflation and interest rates, the impending restart of student loan repayments presents yet another potential obstacle.
The pause on federal student loan payments, which was implemented during the peak of the pandemic in 2020, will expire in late summer. In September, interest will begin accruing once again, and payments are set to resume in October.
Despite the hopes of many borrowers for some relief, the Biden administration’s plan to alleviate the burden of loan repayments was recently struck down by the Supreme Court. The plan aimed to cancel federal student loans worth up to $20,000 for 43 million borrowers, with complete loan forgiveness for 20 million individuals. However, the court deemed the plan to be beyond the government’s authority.
The resumption of loan payments will compel numerous individuals to allocate hundreds of dollars each month towards their loans, funds that were previously spent on other expenses over the past three years. While this reduction in spending may not significantly impact the $26 trillion U.S. economy, which remains the world’s largest, certain industries are expected to bear the brunt of the consequences, particularly e-commerce companies, bars and restaurants, and some major retailers.
Although these effects may not be sufficient to weaken overall economic growth, the change in spending patterns among many young adults could introduce additional uncertainty into an already unsettled economy. The uncertainties range from whether the Federal Reserve will effectively manage inflation and curb interest rate hikes to concerns about a potential recession by next year, as feared by numerous economists.
Josh Bivens, the chief economist at the Economic Policy Institute think tank, suggests that the anticipated impact on the economy may account for approximately one-third of a percentage point of the gross domestic product (GDP), which amounts to roughly $85 billion to $90 billion annually. Bivens emphasizes that while this impact is not insignificant, it is unlikely to be a game-changer at the macro level.
Despite the rising interest rates experienced over the past year, consumer willingness to spend has helped sustain the economy. Consumers have had the financial capacity to engage in online shopping, dine out, and make various purchases ranging from outdoor furniture to new appliances. This is partly due to the government’s allocation of around $5 trillion since 2020 to mitigate the economic fallout from the COVID-19 pandemic.
However, as these pandemic relief programs, including the student loan moratorium, come to an end, they contribute to the challenges currently faced by the economy.
According to Neil Saunders, managing director of the GlobalData Retail consultancy, the suspension of loan payments had provided people with additional disposable income, which they used for spending. However, the resumption of loan payments is expected to reduce consumer spending, with Deutsche Bank analysts estimating a potential shrinkage of $14 billion per month, averaging $305 per borrower. Online commerce, mail-order companies, restaurants, and bars are likely to be the hardest hit by this change.
Among the companies identified by Deutsche Bank as potentially affected are Macy’s, Target, and Kohl’s. However, Walmart, being the largest retailer and having a significant grocery business, is expected to be less impacted. Dollar stores and discount retailers may even benefit if financially constrained consumers seek more affordable options.
Goldman Sachs’ chief economist, Jan Hatzius, and colleagues anticipate a “modest drag” on the economy with the end of the student loan moratorium, resulting in a 0.2% reduction in consumer spending growth this year. They note that this impact would have been half as significant if the Supreme Court had allowed the Biden administration’s debt forgiveness program to proceed.
Since the onset of the COVID-19 pandemic in early 2020, the economy has experienced a rollercoaster ride. A severe recession struck in March and April of that year, followed by a rapid and resilient recovery fueled by substantial government assistance.
However, this economic recovery has come with its challenges. The surge in consumer demand has overwhelmed global factories, ports, and freight yards, leading to delays, shortages, and significantly higher prices. Inflation soared to levels not seen since the early 1980s last year.
To address inflation, the Federal Reserve began raising its benchmark short-term rate in March 2022 and has since increased it 10 times. The objective of these rate hikes was to slow down the economy and mitigate price acceleration. As a result, consumer price inflation, which peaked at 9.1% year-over-year in June 2022, fell to 4% in May. However, this figure is still twice the Federal Reserve’s target of 2%, prompting the central bank to indicate the likelihood of more rate hikes this year.
Concurrently, the government has been phasing out pandemic relief measures. Extended unemployment aid ended in September 2021, and the expansion of the food stamps program also concluded this year. The savings that Americans had accumulated during the peak of the pandemic, when they received government relief checks and were confined to their homes, are now depleting. Federal Reserve researchers have reported that any excess pandemic savings likely disappeared in the first quarter of 2023.
Despite these 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 noted that consumers were spending at their fastest pace in nearly two years. In addition, the job market remains robust, with employers continuing to hire at a brisk pace, and unemployment standing at a low 3.7%, just above a 50-year low. These factors have consistently surpassed predictions made over a year ago that a recession was inevitable.
According to Bivens, the economy has managed to withstand various challenges and uncertainties. He believes that the current situation is unlikely to be the tipping point, stating, “So what is the straw that breaks the camel’s back? My guess is it’s not this. I don’t think it’s a big-enough thing.”
Nonetheless, Bivens expressed concerns about the potential impact of the Federal Reserve’s rate hikes and the discontinuation of federal relief measures, such as the end of the student loan payment moratorium. He believes that these actions could introduce additional contractionary shocks to the American economy, which has managed to defy skepticism thus far.