Student loan repayments will cut billions from consumer spending

by Kim Souza ([email protected]) 1,593 views 

Financial services firm Jefferies estimates student loan payments will cost U.S. consumers $18 billion a month by September. Some economists suggest the hit to household budgets will slow a national economy already slowing due to high interest rates and inflation.

“Americans owning student loan debt will have to pull back on other things like travel and restaurant spending to fit the resumed payments into their budgets. Belt-tightening could hurt an economy that relies heavily on consumer spending,” noted Jefferies economist Thomas Simmons.

Mark Zandi, chief economist at Moody’s Investor Services, predicts student loan borrowers will face an average of $250 a month in extra payments in September when the moratorium is lifted after more than three years. He said the loan repayments reduce consumer spending and will reduce economic growth by 0.2% in the final quarter of 2023.

“In a more typical time, that’s not really that big a deal,” Zandi said. “The economy can digest that gracefully. But in the current environment where the economy is weakening, it raises the risk for recession.”

The Federal Reserve Bank of New York reported in January that the return of student loan payments could force many households to readjust budgets and cut back on things that aren’t necessities. The Fed Bank said many borrowers were already missing payments on other loans, suggesting that they’ll be in deeper financial trouble when payments resume.

Government statistics indicate that 45.9 million Americans hold student loan debt totaling $1.7 trillion. Analysts said student loan repayments would impact the spending power of 17.6% of the U.S. population and most likely reduce retail spending.

Millennials (ages 25-40) with student loans will lose 6.5% of spending power as repayments resume, according to a report from PYMENTS. Retailers from Walmart to Amazon often tout their wins with the millennial consumers who now owe an average of $33,173 in student loan debt in the midst of raising families and running their own households.

Surprisingly, Baby Boomers (ages 57-75) shoulder the highest student loan burden as many took out private loans for their children’s education. The average debt for this older cohort is $44,000 per borrower, accounting for 11% of their disposable income. Generation X borrowers (ages 41-56) owe an average of $43,438 in student loan payments, accounting for 8.8% of their disposable income. The youngest borrowers, Generation Z (ages 8-23), owe an average of $14,315 in student loan debt, which is about 4.3% of their disposable income, PYMENTS reports.

Zandi estimates the cost will be higher by as much as 30% of disposable income on average, making it more difficult for borrowers to cover other obligations and still have extra money to spend.

“It’s certainly a weight at a pretty significantly inopportune time,” he said.

With less than three months before repayment begins, financial consultants suggest borrowers start planning now for how to cover the added expenditure. Kristen Ahlenius, director of education at Your Money Line, recommends borrowers begin making the equivalent of payment to a savings account. She said increasing savings or paying off other liabilities is the best way to prepare for the added expense.

NerdWallet suggests borrowers contact their loan servicer and update contact and income information. They should also find out how much will be owed each month when payments resume and ask about income-based repayments, which could reduce the monthly amount but extend the term. Loan servicers are expecting an onslaught of calls as September approaches. Nerdwallet suggests getting ahead of the pack and making contact as early as possible.