US is taking an economic hit as student loan payments resume

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The writer is an economist and managing director at PIMCO

Although the drama over a possible US default has quickly faded since Congress passed the debt-ceiling agreement last month, the effects of many provisions in the deal are yet to be felt.

Perhaps most notable is the requirement that all interest payments on federal student loans once again begin on September 1, 2023, with payments due in October. The resumption of payments on most of the $1.6tn outstanding of student loans signals a significant US economic recovery starting in the third quarter of this year.

The Coronavirus Aid, Relief and Economic Security Act – signed into law in March 2020 – followed subsequent executive orders by both the Trump and Biden administrations, halting payments on federal student loans as part of the policy response to the pandemic. According to data from the US Federal Reserve, this moratorium was extended eight times, which means that for more than three years, the nearly 20 million people who borrowed for the cost of higher education could see their average estimated payment of approximately $200 – $400 per month. Haven’t had to. ,

In addition, the roughly 16 million student loan borrowers who were already approved for the Biden administration’s debt cancellation program also won’t get relief because the US Supreme Court recently ruled that the White House has no right to pay off those loans. does not have the right to cancel.

Many US consumers now face additional bills at a time when the economy is already slowing due to more restrictive monetary policy and banking sector stress.

We believe the macroeconomic impact of the resumption of payments will be significant for several reasons. First, this figure may be larger than the widely cited $60 billion annual estimate. This was based on a Federal Reserve Board study of a subset of loans for the first quarter of 2020. However, given the broad sample currently under foreclosure and the recent average federal loan interest rate of 6.36 percent, we estimate that payments are likely to be in the region of $100 billion annually.

Second, despite the additional savings, evidence from credit ratings compiled by credit rating agencies shows that US consumers used the temporary cash flow boost from the pay holiday to take on more debt. Recently University of Chicago paper It highlights that borrowers who benefit from the loan moratorium, on average, have seen faster increases in their mortgage, auto and credit card borrowing. As payments resume, these households will now have to repay their original loan load as well as additional borrowing.

Third, the resumption of student loan payments is not the only government policy that could create volatility in the second half of 2023. The tax filing deadline was extended from April to October for areas affected by natural disasters, including California. Though this has temporarily increased consumption in April, we expect returns in October. We estimate that the change in the tax date could result in a loss of $30 billion to $50 billion on US discretionary income in the fourth quarter.

To be sure, the impact of the payments on discretionary income will not be felt equally across American households. Student loan payments are skewed toward higher-income households, with 28.1 percent of payments coming from the top 20 percent of the income distribution, according to data from the Fed’s Distributional Financial Accounts and Brookings. These same high-income households account for 80 to 90 percent of the additional savings accumulated since the start of the pandemic, indicating they still have some buffer to help meet these payments.

Nevertheless, higher interest payments are likely to wipe out the net additional savings accumulated by many households during the pandemic, and this will impact savings and consumption decisions over the next few years. The annualized monthly payment is estimated to be 5 per cent of the remaining stock of additional savings for an average individual, while excluding the top income quintile, the estimated impact adds up to about 37 per cent of current additional savings – a significant proportion.

The bottom line is that government policy changes are adding to widespread volatility at a time when the US economy is already slowing. While we believe healthy household balance sheets can help improve the overall economy, the impact of higher debt service costs will diminish what has been an important support for overall US growth.

Libby Cantrill of PIMCO contributed to this column