President Joe Biden’s student-loan forgiveness program has met with opposition, particularly from those who argue it unduly benefits a minority of Americans. But at least one economist says people should support the measure, especially those hoping consumer spending and healthy regional banks can keep the US economy from slowing.
Though debt forgiveness is on hold awaiting a Supreme Court decision, Senate Republicans voted this week to repeal the program, which offers up to $20,000 in debt relief to eligible borrowers. The resolution would also end the pandemic-era moratorium on federal loan payments, which is due to expire as early as this summer. The resolution could see some lawmakers crossing party lines, as the president’s plan has not garnered unanimous support among Democrats.
Unfortunately, the three-year resumption of payments comes at a particularly difficult time for many of the roughly 45 million affected borrowers, as inflation has already weighed on budgets. That could inevitably lead to belt tightening and other knock-on effects, argues Jefferies economist Thomas Simons.
Simons calculates that the average pre-pandemic monthly student loan payment of $393 equates to about 0.6% of personal income — or 0.8% of personal consumption expenditure (PCE) and 1.3% of discretionary PCE , which excludes necessities such as food and housing.
“That may sound like a modest blow, but the impact on income is very similar to the tax hikes associated with ‘The Fiscal Cliff’ of 2013, which were followed by a noticeable slowdown in consumption,” he writes.
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Of course, the economy didn’t crash in 2013. Even so, the outlook is still worrying now: Persistently high inflation has drained the savings of Americans who had been fueling spending.
“About half of the ‘excess savings’ that accumulated on household balance sheets during the pandemic is now gone, concentrated in wealthier households,” warns Simons. “So households are not as well protected from a shock like this as they would have been last year.”
That’s not welcome news for more discretionary businesses, from retailers to restaurants. However, it could have wider implications as some households falter.
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While default rates on student loans have been almost non-existent since the freeze, trends on other debt point to an obvious strain when the moratorium ends. Mortgage, auto loan and credit card arrears have accelerated recently and are approaching pre-pandemic levels. With student loan payments resuming, many people will likely face difficult decisions and drive up debt default rates across the board as borrowers prioritize which bills to pay.
Some may turn to other loans to make ends meet. Those who do are likely to be the most cash-hungry and therefore at greater risk of default — not the sort of borrowers that financial institutions necessarily lend to.
“Declining credit demand was already a viability risk for small and regional banks before the recent onset of stress and deposit flight,” concludes Simons. “Risks have increased significantly over the past month and will continue to increase as household credit quality deteriorates.”
Write to Teresa Rivas at [email protected]
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