scorecardHere's why the restart of student loan payments won't end up dragging down the economy
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Here's why the restart of student loan payments won't end up dragging down the economy

Matthew Fox   

Here's why the restart of student loan payments won't end up dragging down the economy
PolicyPolicy2 min read
  • The upcoming restart of student loan payments shouldn't drag down 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 repayment can offset the potential cyclical drag," NDR said.

Don't expect the upcoming restart of student loan payments to drag down the US economy, according to Ned Davis Research.

Student loan payments are expected to restart in October for the first time since the start of the pandemic 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 estimates by the Federal Reserve.

That monthly payment could effectively be used for consumption or to pay down other debts, and given how many Americans have student debt, the suspension of that payment over the past three years could partly explain why the US economy has been so resilient.

Adding to the worries of the resumption of student loan payments is the fact that credit card debt just topped a record $1 trillion, suggesting that consumer finances are getting stretched.

But according to a Wednesday note from NDR economist Veneta Dimitrova, there are several reasons to believe that the restart of student loan payments should have only a limited negative impact on consumer spending and the broader economy.

Most student loan debt is held by high-income earners "and those with advanced degrees who are better positioned to make payments," according to Dimitrova. "They typically have greater income flexibility and could absorb the loan payment resumption without a significant hit on discretionary spending."

NDR estimates that there wil be $217 billion in student loan payments on an annualized basis, which represents just 1.1% of disposable personal income and 1.2% of personal consumption expenditures. And excess consumer savings could more than cover the upcoming resumption of student loan payments, according to NDR.

"Excess savings and government plans to facilitate repayment can offset the potential cyclical drag," Dimitrova said, estimating that there is still nearly $600 billion ine xcess savings from the pandemic.

"Based on the rough estimate of $217 billion in annual student loan payments, this [$600 billion in excess savings] would be sufficient to cover payments for nearly 2.75 years. It's one reason why we do not expect student loans to be a major source of disruption to consumer spending and growth this year," Dimitrova said.

Finally, the federal government is providing income-driven repayment plans, some of which have the option to cancel all remaining student loan debt after 20 or 25 years of qualified payments.

"For all of these reasons, we do not expect the resumption of student loan payments in October to be a watershed moment for consumer spending or the cyclical performance of the economy. We estimate that it will shave off 0.1% to 0.2% of real GDP growth in Q4," Dimitrova said.

And that helps explain why NDR still sees no economic recession materializing in the near-term.




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