- The upcoming resumption of student loan payments should not weigh on the economy, according to Ned Davis Research.
- About 46 million holders of $1.77 trillion in student loan debt are expected to resume payments in October for the first time since March 2020.
- “Excess savings and government plans to facilitate repayments can offset the potential economic burden,” NDR said.
Don’t expect the upcoming resumption of student loan payments to weigh on the US economy, according to Ned Davis Research.
Student loan payments are expected to resume in October for the first time since the pandemic began in March 2020. There are about 46 million holders of $1.77 trillion in student loan debt, and the average monthly payment is about $393, according to the Federal Reserve.
That monthly payment could effectively be used for consuming or paying off other debt, and considering how many Americans have student debt, the suspension of that payment over the past three years may partially explain why the US economy has been so resilient.
Adding to concerns about the resumption of student loan payments is the fact that credit card debt just surpassed a record $1 trillion, suggesting consumer finances are getting tight.
But according to a note from NDR economist Veneta Dimitrova on Wednesday, there are several reasons to believe that the resumption of student loan payments is likely to have only a limited negative impact on consumer spending and the broader economy.
According to Dimitrova, most student loan debt is held by high earners, “and those with advanced degrees who are better able to make payments.” “They typically have greater income flexibility and could absorb the resumption of loan payments without a significant impact on discretionary spending.”
NDR estimates that there will be $217 billion in student loan payments on an annual basis, which is just 1.1% of disposable personal income and 1.2% of personal consumption expenditure. And excess consumer savings could more than cover the forthcoming resumption of student loan payments, according to NDR.
“Excess savings and government plans to ease repayments can offset the potential cyclical drag,” Dimitrova said, estimating there was still nearly $600 billion in excess savings from the pandemic.
“Based on the rough estimate of $217 billion in annual student loan payments, that’s the case [$600 billion in excess savings] would be enough to cover almost 2.75 years of payments. “That’s one of the reasons why we don’t expect student loans to become a major disruption to consumer spending and growth this year,” Dimitrova said.
Finally, the federal government offers income-tested repayment plans, some of which offer the option to cancel any remaining student loan debt after 20 or 25 years of qualifying payments.
“For all these reasons, we do not expect the resumption of student loan payments in October to be a turning point in consumer spending or the cyclical development of the economy. We estimate that this will cost 0.1% to 0.2% of real GDP growth in the fourth quarter,” Dimitrova said.
And that also explains why the NDR does not expect an economic recession in the short term.
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