A ‘$100 billion drag’ on U.S. consumer spending is coming. Here’s what’s behind it.

“So resuming student loan payments in October will subtract roughly $9 billion from consumer spending every month, or roughly $100 billion a year,” Torsten Sløk, chief economist and partner at Apollo Global Management, said in a research note Monday.

This, he added, “will mainly have an impact on younger households.” Roughly 6% of federal student-loan debt is shouldered by adults under the age of 25; adults aged 25 to 34 hold 30%, while nearly 39% belongs to those aged 35 to 49, according to the Education Data Initiative, an online resource for students, teachers, policy makers, and others. 

Student-loan payments will resume this fall after they were paused for more than two years due to the COVID-19 pandemic. In June, however, the Supreme Court knocked down President Biden’s debt-forgiveness plan.

Biden’s plan aimed to cancel up to $10,000 in federal loan debt for borrowers earning less than $125,000 a year, and up to $20,000 for borrowers who met that criteria and also used a Pell grant in college. Democratic lawmakers argued that forgiveness would help the most vulnerable borrowers, while many Republicans said forgiveness would merely leave the taxpayer to pick up the bill. Economists have also weighed in on the wisdom and effectiveness of Biden’s plan.

Interest on federal student loans will start accumulating on Sept. 1, and the first payment after the moratorium is lifted will come due in October.

Expect increased delinquencies

Economists and analysts have expressed concern about the potential impact of the resumption of student-loan payments on the economy, especially on consumer spending and household finances. 

Case in point: The return to student-loan payments could increase delinquencies on other household debt. During the payment pause, many people said they were able to pay off credit-card debt, among other personal loans, and were also able to save.

While consumers have been paying their debt back and delinquencies are “subdued for now,” they’re still rising, Bank of America
BAC,
-0.20%
economists wrote in a note last month.

A rising number of people have been more than 30 days late on their auto loans and credit-card debt, BofA noted, and the share of people who are seriously delinquent on loans, or more than 90 days late on their debt, has risen above pre-pandemic levels. 

If student-loan payments resume in full, “we estimate that serious delinquencies could rise by about 67% over time,” BofA stated, “with risks of knock-on effects to other forms of household debt as well.”

The Consumer Financial Protection Bureau estimated that more than 1 in 13 student-loan debtors are currently behind on their other payment obligations. 

But the Biden administration has said it has not given up on student-loan forgiveness. After June’s ruling on loan forgiveness by the Supreme Court, the Department of Education filed notice saying it would embark on a regulatory process that would seek an alternative pathway to student-debt relief. 

Using that process, known as “negotiated rulemaking,” the department said it will take comments from the general public on questions relating to debt forgiveness, and gather a group of stakeholders to discuss a proposed rule related to the waiver and compromise authority under the Higher Education Authority. 

Quentin Fottrell contributed.

Also see: 

Inside the room where Biden administration officials and college leaders game planned college admissions after affirmative action

Biden administration to cancel $130 million in student debt for borrowers who say they were scammed by their school

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