WASHINGTON — When payments for state student loans resume in the fall, they are expected to drain the economy of up to $71 billion of otherwise disposable income each year, of which $5.3 billion will come from Arizona.
The economic pain could be very real for the 43 million borrowers — about 880,000 in Arizona — who need to start paying off their student loans after a more than three-year hiatus that began as a pandemic relief effort.
“We’re hearing from borrowers, some even from Arizona, telling us that when payments resume, they won’t be able to afford food, rent, and I won’t be able to afford health care,” said Cody Hounanian, executive director of the Student Debt Crisis Center.
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While the amount these repayments will hurt the economy seems scary, a report by Moody’s Analytics says they will represent only about 0.4% of the country’s disposable income, calling Moody’s economist Bernard Yaros “modest headwinds.” “ for the economy as a whole.
“It’s a burden, but a very modest one at that, and it really isn’t enough to derail the economy,” Yaros said, noting that the payments are likely to push personal spending down by 0, 2% will decrease.
Yaros said slowing inflation, likely peaked interest rates and a stubbornly resilient labor market weighed more heavily on the long-term health of the US economy than dollars lost on loan payments over the next year.
“None of this is intended to minimize the micro-impact that this will have on specific populations or specific households,” Yaros said. “It’s going to be a big deal for certain groups of people, they need to cut back on spending to start paying those student loans.”
Repayments are scheduled to resume on Oct. 1, after a turbulent summer in which Congress voted to block the Biden administration from further extensions of the pandemic-era moratorium and the Supreme Court approved a separate White House plan that would have forgiven up to $20,000 in some borrowers’ debts.
Biden, who campaigned by promising sweeping debt relief for student borrowers, has since responded with alternative plans that his administration hopes will withstand demands from Congress and the Supreme Court.
These include an “on-ramp” repayment — which protects borrowers’ creditworthiness by not reporting missed payments for a year — and an expansion of a current plan that limits monthly payments to 10% of income for some borrowers and loan balances after 20% waives years of regular repayment. The expanded plan would cut these limits in half, to 5% and 10 years.
Before the president announced his latest plans in June, the Education Data Initiative estimated that debt repayments would take $5.3 billion out of Arizona’s economy. That’s about 1.5% of the state’s $350 billion gross domestic product, said Lee McPheters, an economics professor at Arizona State University’s WP Carey School of Business.
McPheters said the payback is “one of those things where the impact on the people affected by the policy is big, but the overall impact on the economy is relatively small.”
He estimated that the average monthly individual student loan payment in Arizona will be about $500, or about $6,000 per year. With an average Arizona family income of $75,000, that means borrowers spend about 8% on repayments.
“Younger consumers with lower annual incomes will have to make some tough decisions about their spending, but overall the economy will continue with its normal business cycle,” McPheters said.
Moody’s analysis found that the regions of the country with the highest student loan balances also had below-average median ages.
Yaros said the level of debt “doesn’t seem to be that high in Arizona compared to other states,” particularly the East Coast states. According to Moody’s, Philadelphia had the highest debt per capita at $5,859 and Greater Atlanta was second highest at $5,830.
In comparison, the Phoenix-Mesa-Scottsdale region had the highest student debt per capita in Arizona with $3,749, followed by Flagstaff with $3,274. Yuma had the lowest per capita debt in Arizona at $1,675.
Rawley Heimer, an economics professor at the Carey School, cited Arizona’s many universities, which have “relatively low tuition fees,” as one reason for the relatively low level of public debt.
“The typical Arizonan who attends these schools almost certainly has significantly fewer financial commitments than someone who attends, say, an expensive out-of-state private school,” Heimer said.
However, he and McPheters agreed that while the payments were relatively low, they weren’t necessarily good news for young borrowers with low incomes and high levels of debt.
“Younger people are trying to save for big purchases, so this could have an impact on the real estate market, where people who were previously trying to save money for a down payment are instead having to pay off their debt,” Heimer said.
The Supreme Court’s rejection of Biden’s debt relief plan was “particularly impactful for younger people who have not benefited from many of the government policies in place for many years” that have allowed older generations to build wealth, he said. Notice of Mortgage Income Tax Deductions.
Facilitating such intergenerational wealth transfers could benefit the economy in the long run, Heimer said.
“Any time the government can give a gift to the younger generation between 20 and 40, I think it’s a net win for the economic future of the country as a whole,” he said.
Even in a state like Arizona, and despite the benefits of Biden’s recent debt relief plans, Hounanian said there’s still a longer-term threat to the economy from student debt repayments resuming. He said the plans, while well-intentioned, would only delay an inevitable series of student defaults, which he fears will have “serious consequences” for vulnerable borrowers.
Hounanian pointed to a June Consumer Financial Protection Bureau survey that found about one in five student debt holders have risk factors that suggest they will face difficulties when payments resume. That includes a 24% increase in other monthly debt payments since the pandemic began.
“Together with the Consumer Financial Protection Bureau and the Federal Reserve, we are really concerned about a wave of student loan defaults in either 12 months or two years, once you know the domino effect of all this is really starting to take hold.” in,” Hounanian said.
The study pointed to the gradual increase in interest rates over the course of the three-year moratorium, which translated into higher monthly payments on all debt instruments.
Hounanian said these increases, along with factors such as increased rent and housing costs and a lack of clear information about student loan repayment programs, “multiplied” the financial hurdles borrowers were already facing before the pandemic.
“Many will have to make the choice to default over the safety and health of their families,” Hounanian said. “If a borrower is about to pay off a student loan or has a roof over their heads, they leave with a roof over their heads.
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