WASHINGTON — The Supreme Court’s decision to strike down President Joe Biden’s plan to eliminate billions of dollars in student debt is expected to have a ripple effect on the economy as millions of households begin to make room in their budgets for monthly loan payments.
Since March 2020, when then-President Donald Trump paused student loan payments at the start of the pandemic, millions of borrowers have stopped earning billions of dollars in monthly loan payments and have diverted that money to other bills and needs, according to economists and the consumer surveys.
Now, with payments scheduled to restart within the next two months for an estimated 44 million borrowers, economists are raising concerns about whether many will be able to make their payments amid worrisome signs for the American consumer, including lower rates. savings, increased credit card debt. and a spike in auto loan defaults.
“People are already on the brink of affordability, so this could really tip the scales for some people and they will have to move back somewhere else,” said Thomas Simons, a senior economist at Jefferies, a financial services firm. «I would expect that, at the very least, you’ll see a pullback in spending, but also probably a fairly significant increase in delinquency rates and poor performance on outstanding consumer debt.»
Limited data is available on how much the average borrower will owe when payments resume or how many borrowers regularly defaulted during the pause, but Simons estimates that at least 40 million borrowers will resume payments with an average monthly bill of about $400, according to federal data. Reserve surveys and other government data.
That means at least $12 billion a month could flow out of family budgets and go toward student loans instead of other consumer items, Simons said.
Mark Zandi, chief economist at Moody’s Analytics, estimated on CNBC interview that the resumption of payments could subtract «a couple of tenths of a percentage» from the country’s gross domestic product. It is unlikely to send the United States into a recession, he said, but it adds pressure to an economy already under pressure from high inflation and rising interest rates.
Biden announced last August that his administration would cancel up to $20,000 in student loan debt for Pell Grant recipients, a federal award for low-income college students, and $10,000 in loan forgiveness for all other federal borrowers with lower annual incomes. to $125,000 and families with joint income. income less than $250,000.
The White House said the plan would reduce the debt of 43 million borrowers and eliminate the entire remaining balance of about 20 million borrowers. He also said that almost 90% of the relief for those who are no longer in school would go to people who make less than $75,000 a year.
But the plan was put on hold after the plaintiffs challenged it in court, claiming the government’s proposal violated the Constitution and federal law. They argued that it bypassed Congress, which they said has the sole power to create laws related to student loan forgiveness.
The Supreme Court ruled that the program was an illegal exercise of presidential power because it had not been explicitly approved by Congress. In the 6-3 ruling, the court rejected the Biden administration’s arguments that the plan was legal under a 2003 law that says the government can provide relief to student loan recipients when there is a «national emergency,» allowing you to act to ensure people are not “in a worse economic position” as a result of the emergency.
Even before the Supreme Court decision, Wall Street analysts had begun warning investors that retail sales could slow as borrowers with remaining debt begin shifting money toward loan payments and away from bills and consumer discretionary purchases.
TO survey Earlier this year by CreditKarma.com found that 26% of respondents with outstanding loans said the money they previously paid on their student loans was now used to pay bills and other necessities.
Retailers could see their sales reduced by as much as 2% starting in the second half of the year as a result of the resumption of payments, according to a research report by JP Morgan analyst Christopher Horvers. Had Biden’s debt forgiveness plan stuck, Horvers estimated a $5 billion cut in consumer spending due to restarting loan payments for those unaffected by the plan. But without debt relief, he expects consumer spending to drop by $10 billion.
Among the retailers most likely to be affected are Target, Best Buy, Dick’s Sporting Goods and Ulta Beauty, given their reliance on Generation X and millennial consumers and their geographic footprints in areas where borrowers have the highest loan payments, as in the northeast, Horvers said.
The resumption of loan payments could also add pressure to an already tense housing market for first-time homebuyers. Before the pandemic loan pause, student debt had been a major barrier for those looking to buy their first home, said Jessica Lautz, deputy chief economist for the National Association of Realtors.
TO survey by the association found that about half of all student loan holders said debt had delayed buying a home.
“We consistently find that it is the largest debt that young adults have and that they have difficulty not only saving for a down payment, but also qualifying for a mortgage due to their debt-to-income ratio, or a late payment that could have impacted your credit down the road,” Lautz said.
The resumption of loan payments comes as homebuyers are already struggling with rising interest rates, tighter lending and home prices that remain well above pre-pandemic levels. Last year, the number of first-time homebuyers fell to 26% of all buyers, the lowest level on record, with the median age as low as 36, according to data from the National Association of Realtors.
“Seeing age rise and participation drop dramatically means there are significant hurdles in the housing market for young buyers,” Lautz said. “Student loan debt is just one of the additional struggles that has been a big problem for those young adults.”