The return of student loans payments in October will reduce consumer spending in the US by as much as $9 billion each month, or more than $100 billion a year, according to a new report by Oxford Economics.
As monthly debt payments resume, gross domestic product growth could drop by an estimated 0.1% in 2023 and 0.3% in 2024, increasing the likelihood of a recession, the research firm said.
Borrowers are preparing to make payments on their student loans after a three-year pause that began in March 2020. With the average monthly bill at about $400, many Americans will struggle to cover their bills at a time when housing costs have surged and inflation has driven up everyday expenses.
The Supreme Court’s recent decision to strike down President Joe Biden’s student loan forgiveness plan could also negatively affect consumer spending, since some borrowers built into their financial plans the expectation that at least some of their loans would be forgiven, the report said.
About 20 million borrowers transitioned to forbearance status when the pandemic began, saving about $7.5 billion each month in student loan payments. The total savings now amounts to $9 billion each month, because millions of new graduates have yet to make any payments. Researchers at Oxford Economics expect consumer spending to drop by that full amount starting in the fourth quarter.
However, an excess of household savings could mitigate the damage. Student loan forbearance helped borrowers save a collective $87 billion through the second quarter of 2022, according to the Federal Reserve, and at that pace, Oxford Economics estimates another $44 billion was added through the first half of this year.
--With assistance from Alexandre Tanzi.
This article was provided by Bloomberg News.