Student loan payments restarted after a COVID pause. Why the economy is barely feeling it.

The relaunch of student loan payments this fall was expected to pose a hurdle to an economy facing a sharp slowdown and possibly even a recession next year.

It isn’t, at least partly because many of the borrowers, who collectively owe $1 trillion, aren’t paying up amid a year-long grace period. Others are taking advantage of the Biden Administration’s income-based payment and loan forgiveness programs.

“It’s posing less of a drag (on the economy) and one small factor helping to avoid recession,” says economist Nancy Vanden Houten of Oxford Economics.

Why were student loans paused?

Congress paused federal student loan payments in 2020 because of the COVID-induced recession, giving Americans $260 billion in extra cash to help pay the bills and juice a teetering economy.

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But the 3½-year-old freeze ended in October, with 22 million borrowers scheduled to make a payment that month and another 6 million set to join them later in the fall.

The payments were projected to total up to $9 billion a month, potentially reducing consumer spending by a similar amount, Van Houten says. Since consumption makes up about 70% of economic activity, she reckoned that siphoning away that much money would shave economic growth by three-tenths of a percentage point in 2024. That amounts to about 240,000 fewer jobs added to the labor market.

For an economy projected to grow a meager 1% or so next year, the student loans -- along with the depletion of pandemic-related household savings, record credit card debt and still-high interest rates and inflation – could be enough to possibly tip the nation into a downturn, some economists and business leaders said.

"The upcoming resumption of student loan repayments will put additional pressure on the already strained budgets of tens of millions of households," Target CFO Michael Fiddelke told analysts in August.

So far, the hit to the economy is looking far more mild than feared.

How much is total student loan payments per month?

Student loan payments did surge from $1.2 billion in July to $6 billion to $7 billion each month from August to October, according to the Treasury Department and Oxford. But Van Houten suspects that’s largely because some borrowers decided to pay off much of their principal to minimize the impact of higher interest rates.

In November, student loan payments totaled just $5.3 billion and are averaging $1.2 billion a week, or a pace of $4.8 billion a month, so far in December, Treasury data shows. Van Houten estimates they’ll settle at about $5 billion monthly and trim economic growth by a modest one- to two-tenths of a percentage point next year - far less than the up to $9 billion hit to the economy she initially predicted.

In the past couple of months, economists have revised down their estimates of the effects of the loan payments but the actual fallout appears to be even more limited.

Several reports show that many borrowers are still weighing their options instead of paying their student loan bills.   

How many student loan borrowers are not making payments?

In October, just 60% of the 22 million borrowers with payments due made them, the Department of Education said in a blog on Dec. 15. That means 40%, or about 9 million borrowers, missed payments, not including those already in default or receiving a deferment or forbearance. That's a much larger share than the average 16% of borrowers who were delinquent before the pandemic, says Mark Kantrowitz, a student loan expert and author of How to Appeal for More College Financial Aid.

Kantrowitz says he always expected the economic impact of the payments to be small, but because so many people aren't paying yet, it's turning out to be even more modest than he anticipated.

In the blog earlier this month, Undersecretary of Education James Kvaal suggested that many borrowers are bewildered as they struggle to cope with the end of the payment freeze.

“While most borrowers have already made their first payment, others will need more time,” he wrote. “Some are confused or overwhelmed about their options. We want to make sure borrowers know that our top priority is to support student loan borrowers as they return to repayment.”

In a New York Life survey of 402 student loan borrowers in September, 27% said they weren’t sure how they would repay their loans when the pause ended. Another 23% said they would cut back on “lifestyle expenditures,” such as eating out and concerts.

Another poll by Circana, which researches consumer behavior, found that 9% of borrowers planned to continue not to pay, 10% were awaiting future news about government plans and 10% weren’t sure what to do.

“That makes for a large amount of people not paying,” at least for a while, Marshal Cohen, Circana’s chief retail industry analyst, wrote in an email. “That means 3-4 billion dollars a month avoids being pulled back from discretionary spending.”

Kantrowitz, however, says that even before the pause in student loan payments, the obligations amounted to just 0.4% of the nation’s gross domestic product.

“It’s a tiny percentage of GDP,” he says. “It’s not enough to cause the economy to have an earthquake.”

Is consumer spending up or down?

Consumers, meanwhile, continue to spend at a healthy clip. Retail sales rebounded last month after flagging in October.

Here are alternatives the Biden Administration is offering student loan borrowers that are reducing payments and their effect on the economy:

Grace period

A 12-month “on-ramp” allows borrowers to defer payments until as late as next September. They won’t be subject to default and their failure to pay in the meantime won’t affect their credit scores. But the loans will continue to accrue interest.

That means many additional student loan payments will resume by September but the impact on the economy will be softened because it will be spread over time.

Income-based payment plans

The Biden Administration’s new income-driven payment plan, called SAVE (Saving on a Valuable Education), is more generous than existing such plans and 5,5 million borrowers are now enrolled in it, the Education Department says.

Borrowers can pay just 10% of their disposable income, a figure that will drop to about 5% in July, compared to an average 12% under other income-based plans, Kantrowitz says.Also, single borrowers earning less than $32,800 and a family of four making less than $67,000 have no payments, higher income thresholds than other such plans. Of the 5.5 million borrowers enrolled in SAVE, 2.9 million have zero payments.

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Debt cancellation

The Education Department has canceled about $132 bullion in debt for some 3.6 million borrowers, more than any other president. Debt has been forgiven for public-sector workers and borrowers who have made payments for at least 20 years, among others.