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Economists wary of economic impact as student loan payments resume

The resumption of student loan repayments on Sunday could have a negative effect on the economy as debt-saddled Americans cut back on other purchases, economists say. File Photo by John Angelillo/UPI
The resumption of student loan repayments on Sunday could have a negative effect on the economy as debt-saddled Americans cut back on other purchases, economists say. File Photo by John Angelillo/UPI | License Photo

Oct. 1 (UPI) -- More than 40 million U.S. student loan borrowers faced requirements to resume making their payments starting Sunday as a pause for the COVID-19 pandemic expired, sparking concerns the economy could suffer.

The U.S. Department of Education's COVID-19 relief for student loans ended this year, nearly three years after former President Donald Trump first authorized forbearance on loan payments due to the pandemic.

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Interest on the loans resumed on Sept. 1, while payments came due beginning Sunday.

In anticipation of the deadline, the Biden administration in August launched the Saving on A Valuable Education, or SAVE, plan, part of its broader efforts to make college more affordable and support students and borrowers, under which applicants can reduce their payment amounts depending on their incomes.

The White House last month touted the cancellation of more than $116 billion in student loan debt for 3.4 million borrowers, but its ambitious plans to cancel up to $20,000 in student debt for Pell Grant recipients and up to $10,000 for many individual borrowers were struck down by the U.S. Supreme Court in June.

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Meanwhile, the 43 million current student borrowers still have more than $1.6 trillion outstanding on their loans, according to education department data, prompting widespread concerns that a return to strict payments will trigger personal finance difficulties that could spill over into the broader economy.

Research by the nonpartisan Education Data Initiative shows that since 2006, the total national student loan debt balance has increased by 116%, or at an annual rate of 8%, while soaring 399% since 2000.

The group also cites other data indicating that when the student debt load goes up, consumer spending decreases and business growth suffers. For instance, 18% of student loan holders say they find it difficult to buy daily necessities because of their debts, while those with outstanding loan payments are 36% less likely to purchase a house.

An economics expert at Temple University in Philadelphia said Tuesday that student loans have a significant impact on the overall health of the economy.

"Having to pay back student debt interferes with sometimes the ability to just buy a house, so they don't qualify for it, or certainly constrains the value of the house they can buy," economics professor Donald Wargo said in a release. "And we're finding that to be a serious problem for millennials right now."

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During the past three years of forbearance, many borrowers have been able to distribute their payment money elsewhere into the economy, but that situation will now likely change, said Tom Aliff, a risk advisor for the credit firm Equifax.

"With those loans now restarting, coupled with inflationary costs across a number of goods and services, there will likely be challenges to consumer cash flow and impact to credit status if those repayment obligations are not met," he said in a statement released Wednesday.

The true effects on the economy will not be known immediately since delinquency reporting will not begin until the fourth quarter of 2024, thus creating uncertainty in the short term.

Borrowers, Aliff said, actually increased their debts by the end of 2022 and it's estimated that those who benefitted from forbearance have taken on an additional $1,800 in non-student loans, such as mortgage and auto loan debt, during the pause.

However, not all economists think the payment resumption will have a significant impact.

"I think there's a lot of uncertainty about how it's going to impact the consumer, particularly at a time when households are already becoming more financially vulnerable," Wells Fargo Bank economist Shannon Seery told The Oregonian.

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"We might see somewhat of a slowing in total spending in October, but it's not going to have a significant effect on overall household spending."

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