- Student-loan payments are resuming in October after a three-year pause.
- A study from TransUnion found some borrowers could be facing $500 monthly payments.
- This could put a drag on the economy with consumers having less money to spend.
Millions of student-loan borrowers are about to restart payments after an over three-year pause — and it won’t be easy.
At the end of June, the Supreme Court struck down President Joe Biden’s plan to cancel up to $20,000 in student debt for federal borrowers. Just hours after the decision, Biden announced he would be trying again to get debt relief to borrowers using a different law, but he made clear payments are still resuming in October.
And a new study from TransUnion, a credit reporting agency, highlighted just how difficult the resumption could be for some borrowers. According to the study released on Wednesday, TransUnion, using its consumer credit database, found that borrowers are facing a “payment shock” when they have to foot another bill this fall.
About 50% of consumers with student debt that the study analyzed will have a payment of more than $200 a month, and about one in five will have payments of more than $500.
“The majority of consumers with a student loan have not been required to make payments for the better part of three years,” Liz Pagel, senior vice president and head of TransUnion’s consumer lending business, said in a statement. “Payment amounts will vary, but many of these consumers have taken on additional debt since the last time they had to pay their student loans. It’s important for both lenders and consumers to be prepared for this new payment shock.”
To attempt to mitigate the shock of the payment resumption, the Education Department at the end of June announced a series of temporary safeguards. One of those included a 12-month “on-ramp” period once payments resume during which borrowers who miss payments will not be reported to credit agencies, but interest will still accrue during that time. The department will also be implementing its new income-driven repayment plan to lower borrowers’ monthly payments.
Still, even with the department’s efforts to ease repayment, it doesn’t mean the economy won’t take a hit.
Student-loan payment resumption could be a drag on the economy
Paying a new student loan bill starting in the fall means borrowers will have less money to put back into the economy. As Insider previously reported, consumer spending could take a hit once the payment resumption begins — UBS researchers, for example, found that borrowers will likely be spending less at major retailers, and the reduction of spending could have broader implications for the economy.
A Bank of America Institute note from last week showed a large proportion of student debt is held by higher-income borrowers, many of whom hold advanced degrees.
Bank of America found that higher-income borrowers who either stopped making payments since April 2020 or have made periodic payments have accumulated a large amount of savings throughout the pandemic relative to higher-income non-borrowers. Once repayment starts, those high-income borrowers may have to use those savings to pay the new student loan bills.
“They have the ability to kind of buffer that blow, so that is definitely good news suggesting that we’re not going to see very dramatic shifts in their behavior once these repayments start,” Anna Zhou, economist at Bank of America Institute, told Insider on Wednesday. “It is more likely they are dipping into their savings to buffer this negative shock.”
And lower-income borrowers may have to start cutting back come the repayment resumption. Zhou said borrowers making less than $250,000 a year cannot support their total spending with the student loan payments. This means nearly all student debt holders will need to adjust their spending behaviors when payments resume.
“Some of the surveys that we’ve seen, kind of the public sources, do suggest that consumers plan to pull back on some of the discretionary services, for example, leisure, entertainment, and travel, so they will have to make that trade off decision,” Zhou said.
Bank of America analysts expect a mild recession in the first and second quarters of next year, and Zhou said this student debt analysis fits into the broader recessionary framework.
“Consumers have been facing a growing list of downside forces,” Zhou said. “They had to take inflation for a long time, the labor market is starting to slow up, and then on top of that, you have more kind of pressure coming in, such as the student loan payments. This will eventually kind of weigh on their consumer spending decisions and we’ll see a further slowdown.”