Jun 22, 2023
When President Joe Biden and House Speaker Kevin McCarthy came to terms on lifting the country’s debt ceiling, they also put tens of millions of Americans back on the hook for their own debt.
Federal student loans are due to start accruing interest again starting Sept. 1, following a three-year pause that began during the pandemic. Payments will start again in October, according to the Department of Education.
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With around 45 million Americans holding student debt owing an average of $393 per month, U.S. consumption could be impacted by a whopping $18 billion each month, according to investment banking and capital markets firm Jefferies.
The firm believes many households will scale back spending in order to contend with this “student loan cliff,” which could potentially impact the economy as well.
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What does this mean for borrowers?
Many Americans are already living paycheck to paycheck in the midst of high inflation and rising interest rates — without adding student debt to the mix.
In fact, U.S. household debt hit a record $17 trillion in the first quarter of the year while credit card balances are surging.
Student loan borrowers may have no other choice than to pull back on purchases so they can afford their monthly payments or risk accruing interest and adding to their already large pile of debt.
Jefferies compares this to the 2013 fiscal cliff, when tax increases triggered a plunge in consumer spending.
“The additional risk to overall U.S. economic growth is notable — not to mention ill-timed,” the firm wrote in a report speculating on this scenario back in April.
Jefferies also predicts GDP growth to turn negative in the third quarter of 2023 and may not recover until the fourth quarter of 2024.
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A separate report from from JPMorgan forecasts the end of student loan forbearance will slash annual disposable personal income by $38 billion.
Borrowers may not be prepared to resume payments
While Biden had already declared forbearance would likely sunset in August, this legislation restricts him from making any more last-minute extensions as he has done in the past.
However, the debt deal doesn’t touch upon the president’s hotly contested plan for student loan forgiveness — the fate of which is in the hands of the Supreme Court with a decision at the end of June.
“The bottom line here is that there are hardly any changes on the student loan front,’’ Bharat Ramamurti, deputy director National Economic Council, told reporters Tuesday.
“The original Republican bill called for revoking the entirety of the president’s one-time student loan debt relief program ... It called for repealing or rescinding the administration’s income-based repayment reforms that would make monthly payments much more manageable for student loan borrowers. Neither of those are in this final deal.”
But not all are happy with the compromise. Student Borrower Protection Center deputy executive director and managing counsel Persis Yu accused the Biden administration of “folding to pressure” from Republicans, calling the decision to resume student loan payments “cruel and reckless.”
“Senior Biden Administration officials have said, repeatedly, resuming loan payments without first canceling student debt will result in a catastrophic wave of unnecessary borrower distress and default,” Yu said in a statement May 28.
“The government should not be in the business of crushing millions of federal student loan borrowers.”
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Serah Louis is a reporter with Moneywise.com. She enjoys tackling topical personal finance issues for young people and women and covering the latest in financial news.
