The U.S. economy was doing well before student loan payments resumed

College students. Mark Chilton/Getty Images

• The economy rebounded strongly after the pandemic but is showing signs of slowing.
• The resumption of student loan payments is expected to increase the burden even further.
• The impact is greater for individual borrowers who cannot afford the additional costs.

The U.S. economy has thrived over the past three years since the initial shock of COVID-19 gave way to a rapid recovery.

One factor contributing to the recovery was the U.S. government’s student loan payment pause, which gave borrowers more money to put back into the economy.

The payment pause is “very stimulating,” Marshall Steinbaum – senior fellow at the Jain Family Institute and economics professor at the University of Utah – previously told Insider, citing the positive impact on overall demand.

However, as these payments are set to resume, the already weak economic situation will again face headwinds. This money now goes directly to the Ministry of Education and the loan brokers.

Given the deteriorating economic situation, the timing is not optimal. Signs are mounting that the Federal Reserve’s unprecedented interest rate hikes are starting to hit everyday Americans. Even a still red-hot job market can be seen as a negative, fueling the argument that the Fed should keep interest rates higher for longer. All of this means that calls for a recession are flaring up again.

Fed Chairman Jerome Powell himself noted that the revival – accompanied by the United Auto Workers strike and high oil prices – could complicate economic recovery for the rest of the year.

Now borrowers, the Department of Education and the broader economy are entering uncharted territory. After years of relief, millions of Americans never resumed repayment on this scale.

Here’s what banks and economists say about the impact of resuming student loan payments on the economy.

What happens to the economy when student loan payments resume?

It’s difficult to predict exactly how the economy will respond to a surge in borrowers facing student loan repayments again — and that depends on a number of factors. Wells Fargo, for example, said in a note this week that it expects the resumption to be “a relatively limited headwind” because those with large balances – over $100,000 – represent only a small portion of the total number of borrowers and none significant macroeconomic opportunity would have an impact.

However, the impact of the resumption could extend over a longer period of time, depending on how many borrowers take advantage of measures to ease repayment, such as the 12-month “on-ramp” period during which missed payments are not reported to the credit bureaus.

“Even with relatively limited direct macroeconomic impacts, the repayment comes at a time when household resilience is waning and will likely contribute to a slowdown in spending later this year and early 2024,” the note said.

Goldman Sachs had a similar prediction: Last month it said the resumption of growth in the fourth quarter of this year would result in “temporarily slow growth.” However, this will depend on the number of borrowers who choose not to immediately resume payments and those who do enroll in the new SAVE income-driven repayment plan.

Retail is also preparing for a strain. In an August earnings call, Macy’s CEO Jeff Gennette said he expected the resumption of student loan payments to create some headwinds, and Target CFO Michael Fiddelke said during the company’s last earnings call that “the impending resumption Student loan repayments will put additional pressure on the already strained budgets of tens of millions of households.”

What happens to borrowers?

As for the impact on individual borrowers, a June note from Bank of America said the resumption would likely bring a “significant shock” with delinquencies expected to increase in the coming weeks.

And a recent Jefferies survey of 600 U.S. consumers with student debt found that nearly 90% of them said they were “somewhat concerned” about covering their monthly expenses, with half of respondents saying they were “very concerned.”

The administration has recognized the financial burden that resumption will place on borrowers and that they will need to reconfigure their monthly budgets to cover the additional costs.

“There is a lot of fear out there,” Deputy Education Secretary James Kvaal said in September. “And some borrowers have already started making payments. In other cases, there will be borrowers who will need some time to pay student loans back into their household budget.”

Some borrowers are already feeling the strain. Helena, a 58-year-old borrower, previously told Insider that she couldn’t afford her $145,000 balance and wasn’t sure what she would do when her first bill came due.

“It is my faith. That’s what sustained me,” she said. “Because otherwise when I look at the debt, I feel tremendously hopeless.”

NOW WATCH: Popular Videos from Insider Inc.

Is loading…