Jul 10, 2023 - Economy

Warning: Student loan cliff ahead

Illustration: Annelise Capossela/Axios

There's a big economic shock coming this fall for both the economy and millions of American households — the resumption of student loan payments.

Why it matters: For millions of individuals that means real and often painful cuts to spending — cuts that will translate to a slowdown for the economy overall.

  • The pullback will ease inflation on the margins as the Fed tries to navigate a soft landing — but some economists fear it could push the U.S. economy toward recession.
  • "This is definitely a cause for concern," says Jesse Wheeler, a senior economist at Morning Consult. "There are a lot of headwinds already in place with the economy."

Zoom out: Americans with student loan debt tend to be younger, with lower incomes — they're spending a higher share of their income already, so an additional monthly payment will hurt.

  • Overall, the resumption of student loan payments will pull $70 billion a year out of the economy, according to an estimate from Moody's Analytics.

That number is higher than initially expected because the Supreme Court shot down the Biden administration's debt forgiveness plan earlier this month.

  • If the plan had been upheld, the end of the payment pause would have amounted to a 0.2% reduction in real personal consumption expenditures in 2023, per an analysis from Moody's Analytics.
  • Now with the court's decision, and so many folks not seeing their debt erased, the spending reduction will be about 0.4%, Moody's estimates.

The big picture: The coming student loan cliff is the latest in a string of withdrawals of pandemic-era supports. These include the end of both stimulus checks and child care tax credits, as well as the pullback on SNAP benefits and Medicaid supports.

  • The IMF recently said that for the U.S. to truly tame inflation, the government will need to pull fiscal levers — like raising taxes — to suck some money out of the economy.
  • While such moves are a political nonstarter in the U.S., rolling back these COVID-era supports is a backdoor move in that direction.

What they're saying: The U.S. economy is massive, so the impact of student loan payments on GDP will likely be marginal, says Bernard Yaros, an economist at Moody's Analytics.

  • While less spending does reduce inflation, this decline is "not going to solve our inflation problem. Whatsoever," he says.
  • Still, others are less sanguine. "I'm more worried about raising recession odds," right as the Fed is trying to come in for a soft landing, says Michael Madowitz, director of macroeconomic policy at Equitable Growth.

The bottom line: The Supreme Court's decision to overturn the Biden plan on student loan forgiveness complicates an already tricky situation for the U.S. economy.

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