WASHINGTON – The Supreme Court’s decision to reject President Joe Biden’s plan to pay off billions of dollars in student debt is expected to impact the economy as millions of households begin to make room in their budgets for their monthly loan payments.
Since March 2020, when then-President Donald Trump paused student loan payments at the start of the pandemic, millions of borrowers have stopped making billions of dollars in monthly loan payments, according to economists, using the money instead for other bills, necessities and consumer surveys.
Now, with payments for an estimated 44 million borrowers set to resume in the next two months, economists are raising concerns about many being able to afford their payments amid worrying signs for the American consumer, including falling savings rates and rising credit card debt and a surge in debt Auto loan defaults.
“People are already at the edge of affordability, so for some people this could be the tipping point and they will have to retire elsewhere,” said Thomas Simons, chief economist at Jefferies, a financial services company. “My expectation is that there will at least be a decrease in spending, but likely a significant increase in defaults and a worsening of outstanding consumer debt.”
There is limited data on how much the average borrower owes when payments resume, or how many borrowers stopped making regular payments during the pause. But Simons estimates that at least 40 million borrowers will resume payments with an average monthly bill of around $400, according to Federal Reserve surveys and other government data.
That means at least $12 billion a month could flow out of household budgets and into student loans instead of other consumer products, Simons said.
Mark Zandi, chief economist at Moody’s Analytics, estimated in a CNBC interview that resuming payments could take “a few tenths of a percent” off the country’s gross domestic product. The US is unlikely to go into recession, he said, but it is adding pressure on an economy already under the strain of high inflation and rising interest rates.
Biden announced last August that his administration would cancel student loan debt of up to $20,000 for recipients of Pell grants, a federal award for low-income students, and all other federal borrowers with annual incomes under $125,000 and families joint income $10,000 will be waived income below $250,000.
The White House said the plan would reduce the debt of 43 million borrowers and pay off the entire outstanding balance of about 20 million borrowers. It also said nearly 90% of the relief given to those who are no longer in school would go to people earning less than $75,000 a year.
President Joe Biden talks about student debt relief in 2022. Bonnie Cash/UPI/Bloomberg via Getty Images file
But the plan was shelved after it was challenged in court by plaintiffs who argued the government’s proposal violated the Constitution and federal laws. They argued that doing so would bypass Congress, which they believe has the sole authority to legislate on student loan issues.
The Supreme Court ruled that the program was an unlawful exercise of presidential power because it had not been specifically authorized by Congress. In the 6-3 ruling, the court rejected the Biden administration’s arguments that the plan was lawful under a 2003 law that says the government can grant relief to student loan recipients when a “national emergency” is in place, allowing her to take action to ensure people are “not financially worse off” as a result of the emergency.
Even before the Supreme Court decision, Wall Street analysts had begun warning investors that retailer sales could shrink as borrowers with outstanding debt began to shift money toward loan payments and away from bills and discretionary consumer purchases.
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A CreditKarma.com survey earlier this year found that 26% of respondents with outstanding loans said the money they previously paid for their student loans is now being used to pay bills and other necessities.
According to a research report by JP Morgan analyst Christopher Horvers, sales could fall by as much as 2% from the second half of the year due to the resumption of repayments. Had Biden’s debt relief plan remained in effect, Horvers estimated a $5 billion cut in consumer spending by resuming loan payments for those unaffected by the plan. But without the debt relief, he expects consumer spending to fall by $10 billion.
Retailers most likely to be impacted include Target, Best Buy, Dick’s Sporting Goods and Ulta Beauty, as named by Generation consumers.
The resumption of loan payments could also add pressure to the already tight real estate market for first-time buyers. Before the pandemic-induced credit hiatus, student debt was a major obstacle for those looking to buy their first home, said Jessica Lautz, deputy chief economist at the National Association of Realtors.
A survey by the association found that about half of all student loan holders said debt kept them from buying a home.
“We find time and time again that this is the biggest debt young adults have and that they have a hard time not only saving for a down payment but then qualifying for a mortgage because their debt- high income ratio or missed payments have impacted their creditworthiness over time,” Lautz said.
The resumption of loan payments comes as homebuyers are already grappling with rising interest rates, tighter lending and home prices that remain well above pre-pandemic levels. Last year, the number of first-time homebuyers fell to 26% of all buyers, the lowest on record, with the median age being as high as 36, according to the National Association of Realtors.
“With aging and the dramatic decline in the proportion, there are significant hurdles for young buyers in the housing market,” Lautz said. “Student loan debt is just one of the additional issues that are a big concern for these young adults.”
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