When required payments on federally-held student loans resume this September, borrowers will have $5 billion a month less to spend on other things, putting stress on an economy already facing the prospect of a recession.
Borrowers with federal student loans will face an average of $250 a month in extra payments when the pandemic relief pause on interest and required payments comes to an end after more than three years, Mark Zandi, chief economist at Moody’s Analytics, estimated Tuesday in an interview on CNBC. That reduction of spending money in the pockets of borrowers will likely drag down consumer spending, reducing economic growth as measured by the gross domestic product by “a couple of tenths of a percent.”
“In a more typical time, that's not really that big a deal,” Zandi said. “The economy can digest that gracefully. But in the current environment where the economy is weak as it is, recession, risks as high as they are, a couple of tenths of a percent can matter.”
Consumer spending is the most important driver of economic growth, making up 68% of GDP, and how much people spend plays a major role in whether the economy stays humming along or sinks into a recession. While those extra student loan payments aren’t likely to cause a recession by themselves, Zandi said, they are one more headwind for an economy already under pressure from high interest rates and the aftershocks of turmoil in the banking system. The good job market has so far kept a long-predicted recession at bay.
“It's certainly a weight at a pretty significantly inopportune time,” Zandi said.
The return of student loan payments could force many households to readjust their budgets and cut back on things that aren’t necessities. Many borrowers are already missing payments on other kinds of loans, suggesting that they’ll be in deeper financial trouble when payments resume, according to a January research report by the Federal Reserve Bank of New York.
The extent of the financial pain hinges on whether the Supreme Court allows President Joe Biden’s program of student loan forgiveness of up to $20,000 per borrower to go through. The court is currently considering a legal challenge to the case, and experts expect a ruling in late June.