Justin Brown, a father of a 2-year-old who lives with his wife in the St. Louis, Missouri area, has $20,000 in student loan debt. Before the pause on loan payments at the start of the pandemic in 2020, he paid $300 a month. But now that Brown has a family, his financial responsibilities have grown — paying for child care, a mortgage for a house he bought in 2022 and car notes, to name a few.
“I have to look at that $300, like where do I carve it from? Because my income is not going to increase in the next month, and maybe in the near future, but here and now it is what it is and my wife’s is what it is,” said Brown, who works in marketing. “I have to now make a sacrifice and the sacrifice is not going to come at the expense of my kid and it’s not going to come at the expense of my marriage. But it will come at the expense of something that I can live without that I otherwise would choose to [spend money on]. It may mean I may eat out two times a month instead of 10 times a month or that I won’t go to the movies ever again.”
Many borrowers, like Brown, are facing similar decisions this month as student loan payments resumed. Nearly 45 million Americans collectively owe more than $1.7 trillion in 2023 and have an average outstanding loan balance of less than $25,000, according to a Federal Reserve report. They pay an average between $200 and $299 monthly, according to the Fed.
Economists say that hundreds of dollars spent on monthly student loan payments is a loss to the economy and could hurt consumer spending, affect workers’ decisions to stay at their current job or look elsewhere, and delay new home purchases or renting a nicer apartment.
According to a CNBC online poll in January 2022 of 5,162 adults, 81% of borrowers surveyed said they delayed major decisions because of their debt, with 33% deferring a home purchase, 35% setting aside travel plans, and 12% waiting to look for a new job.
“It will be a decline in demand, a decline in overall spending in the economy,” said Mike Konczal, director of macroeconomic analysis at the Roosevelt Institute. “A year ago, people were very worried that there was too much spending in the economy. Now, there’s a little less worry about that and a lot more worry about the real uncertainty that’s going to happen over the next year.”
Konczal said that he sees the resumption of student loan payments as the biggest headwind the economy is facing right now. Less spending in the economy has historically helped trigger a recession, he said. Consumer spending represents two-thirds of economic activity.
Higher education has been associated with higher homeownership rates, but having student debt is associated with lower rates of owning a home, according to findings from a 2017 New York Fed report.
Early in the pandemic with interest rates low and the pause on loan repayments, younger buyers took advantage of the market to buy homes. And while student debt isn’t the biggest roadblock today to home ownership (high mortgage rates are), such purchases will be impacted as potential buyers are faced with student loan repayments, instead of putting that money toward a down payment, according to Selm Hepp, chief economist for CoreLogic.
“If you’re saving that much on a monthly basis over a year, how much of that could help you with the down payment,” Hepp said.
The same holds true for those seeking to upgrade their rentals. “… While we expect to see rent growth go back to the rate that was pre-pandemic, which is like 3% to 4% on a year-over-year basis, which is what we’ve historically seen, that may be subdued because of the student loan payments. So people may not be able to upgrade to that nicer apartment but they’ll just kind of stick it out wherever they are because they now have that student loan [payment],” Hepp said.
Major retailers have already expressed concern over the impact of student loan payments on their businesses. Executives from Macy’s, Walmart, and Target said in August that they were keeping it in mind as a source of financial pressure on consumers.
The Biden administration’s plans last year to cancel up to $20,000 of student loan debt would have helped many borrowers, particularly Black and Latino borrowers. But the U.S. Supreme Court struck down the policy in June. Then in August, the administration announced steps to reduce the financial burden of making payments for some borrowers by basing them on their income and family size and not borrowers’ loan balance.
The Federal Reserve also has recognized the return of student loan payments as it considers future policy. On Sept. 20, Fed Chair Jerome Powell was asked what he thought the looming government shutdown, rising oil prices, and the UAW strike meant for the course of Fed policy.
Describing a “collection of risks,” Powell said “there is a long list and you hit some of them. It’s the strike, it’s the government shutdown, resumption of student loan payments, higher long-term rates, oil price shock. There are a lot of things that you can look at, so what we try to do is assess all of them and handicap all of them. Ultimately though, there’s so much uncertainty around these things.”
