Estimated reading time: 6-7 minutes
WASHINGTON – The relief is over. As the US economy struggles with high inflation and interest rates, the impending resumption of student loan repayments poses another challenge.
In the year The 2020 freeze on federal student loan payments that took effect during the pandemic will end at the end of this summer. In September, interest will begin to rise again. Payments will continue in October.
Although many thought their loans could at least be eased, the Supreme Court last week struck down a Biden administration plan that would have given millions of people some relief from their loan repayments. Biden’s plan would cancel up to $20,000 in federal student loans for 43 million borrowers; 20 million of their loan will be completely written off. The court ruled that the plan was beyond the government’s jurisdiction.
The resumption of those payments will force many people to start paying hundreds of dollars each month in loans — money they’ve been putting aside for the past three years. Spending on goods and services can’t make a big difference in the $26 trillion US economy. Instead, any pain will be concentrated in a few industries, particularly e-commerce companies, bars and restaurants, and some major retailers.
While that may not be enough to dampen overall economic growth, the shift in spending by many adults could cast further doubt on an economy beset by uncertainty over whether the Fed will help curb inflation and keep interest rates at bay. Will a recession hit next year, as many economists still fear?
Josh Bivens, chief economist at the Economic Policy Institute, said the damage to the economy would be about a third of a percent of gross domestic product — the country’s total output of goods and services — or about $85 billion, or $90 billion a year.
“It’s not easy, but it’s not huge,” Bivens said. “On a macro level, my guess is it’s not going to be a game changer.”
Despite more than a year of surprisingly high interest rates, consumer spending has kept the economy in a tailspin. Consumers have had the cash to load up Amazon shopping carts, go out to dinner and buy everything from lawn furniture to new refrigerators, in part because the government has spent $5 trillion starting in 2020 to address the economic damage caused by COVID-19.
But those epidemics, including student loan defaults, are ending aid programs and adding to the obstacles facing the economy.
Neil Saunders, managing director of retail consultancy Globaldata, said: “The moratorium on loan payments has given people a bit more money in their pockets, so they’ve gone out and spent it.
Analysts at Deutsche Bank, which track the retail industry, estimate that the reintroduction of loan repayments could reduce consumer spending by $14 billion per month, or an average of $305 per borrower. The biggest hit could be absorbed by online businesses and mail-order companies, as well as restaurants and bars, they say.
Macy’s, Target and Kohl’s are among the companies that could be affected, according to Deutsche Bank’s analysis. The largest retailer, Walmart, is thought to be insulated from major damage because of its grocery business. (Walmart is the nation’s largest grocer.)
Many cash-strapped shoppers can benefit from dollar stores and other deals that have turned to bargain hunting.
Goldman Sachs Chief Economist Jan Hatsius and his colleagues said they expect the end of the student loan ban to put a “modest drag” on the economy and expect consumer spending to decline 0.2% this year. They say it would have been half as much if the Supreme Court had allowed Biden’s debt relief program to continue.
In the year The economy has endured a wild ride since Covid-19 hit in early 2020. In March and April of that year, a deep recession engulfed the economy. Large-scale government assistance has fueled recovery with surprising speed, strength, and resilience.
But it came at a price: Surging consumer demand overwhelmed the world’s factories, ports and freight yards, resulting in delays, shortages — and much higher prices. Last year, inflation rose to levels not seen since the early 1980s.
In response, the Fed began raising its short-term benchmark rate in March 2022. Since then, the key has increased its speed 10 times. High borrowing costs have had the intended effect of slowing the economy and creating inflation. Consumer price inflation eased to 4 percent in May from a year-over-year high of 9.1 percent in June 2022. However, this is still double the Fed’s 2% target. Therefore, the central bank indicated that there may be further rate hikes this year.
At the same time, the government is avoiding relief from the epidemic. Extended unemployment benefits end in September 2021. The expansion of the food stamp program ended this year.
Since the pandemic hit, Americans have been receiving government aid checks and saving money while cooped up at home. Fed researchers report that any “excess” pandemic savings will likely dry up in the first three months of 2023.
Despite everything, the economy has proved remarkably durable. The government last week sharply revised its forecast for economic growth from January to March to a 2% annual rate and said consumers were spending at their fastest pace in nearly two years. Factor in a still-strong labor market — employers continue to hire at a brisk pace, and unemployment is at 3.7%, a half-century low — and the economy has repeatedly outpaced forecasts that predicted a recession more than a year ago. It is inevitable.
“The economy has really moved through it,” Bivens said. “So what’s the straw that breaks the camel’s back? I don’t think it’s big enough.”
Still, Bivens said, concerns about federal rate hikes and federal cuts, including student loan repayment freezes, “throw more contractionary shocks” into the U.S. economy — at least for now.
Photos
Related stories
The most recent business stories
More stories you might want
[ad_2]