As the US resumes student loan payments, borrowers are grappling with significant financial challenges that could dampen consumer spending and impact the economy. Interest on student loans began accruing on September 1, 2023, with payments due starting October 1, 2023. Currently, there is approximately $1.8 trillion in student loans, of which $1.4 trillion is federal debt. Notably, 62% of borrowers are under 40 years old, with an average debt of $32,000. Experts estimate that repayments could lead to a 9% to 15% reduction in discretionary spending, potentially affecting retail sales by 0.60% to 1.00%. This is particularly concerning as 20-somethings, who make up 20% of new payees, are expected to cut back on spending, while 30-somethings may reduce household formation expenditures. [f73c5bb4]
The resumption of student loan payments is expected to exacerbate existing economic pressures. The unemployment rate has recently risen to 3.8%, despite 187,000 job increases reported. However, payrolls have been revised down by 355,000 jobs this year, indicating a weakening job market. Additionally, consumer loan delinquencies are anticipated to rise as borrowers prioritize their student loan payments over other debts. The average price of a new car has reached $52,000, with interest rates at 9.5%, further straining borrowers' finances. [f73c5bb4]
The financial strain of student debt is evident, as many borrowers are making sacrifices in their personal and professional lives. A recent report revealed that 71% of student loan borrowers have delayed major life events such as buying a house or getting married due to their debt. One in three students currently enrolled in college or post-high school programs have considered stopping their coursework in the past six months, with 31% citing the cost of education as the primary reason. [48bb4ce6]
The pressure for policymakers to address the burden of student debt is growing, with calls for major policy efforts including debt cancellation and overhauling higher education financing. However, not all borrowers plan to resume payments, with some considering organizing a debt strike to advocate for policy changes. The return of student loan payments may significantly affect consumer spending, job decisions, and housing choices, prompting economists to warn that the decline in spending could harm the economy. [48bb4ce6]
Dubravka Ritter, Senior Advisor and Research Fellow at the Consumer Finance Institute, has conducted research on postsecondary education finance and its impact on student loan borrowers. Her findings indicate that many borrowers were unaware of reduced-payment student loan plans and require repeated outreach to understand their options. Ritter's research also highlights that borrowers expect to adjust their budgets by increasing their income, borrowing more, and saving less once payments resume. [7b10813b]