The three-year moratorium on student loan payments will end this summer for millions of young Americans. Recent passage of the “Fiscal Responsibility Act” The Biden administration is prohibited from extending the suspension of student loan payments. This will lead to the resumed payment. This resumption of payments will impact consumer spending significantly and could potentially cause an economic contraction, raising fears about a possible depression.
Key Points
1. The end of student loan repayment moratorium will affect millions of young Americans. After a three year break from payments, recent passage by the “Fiscal Responsibility Act” Raising the debt ceiling led to the restart of student loan payments. Over 40,000,000 Americans have student loan debt.
2. The student loan debt outstanding is significant and the interest rate is higher than that of current bank loans. As of Q1-2023, about $1.8 trillion worth of student loan debt was outstanding. The federal student loan rates ranged between 4.99% and 7.54%. Private student loan rates ranged just below 4% to nearly 15%. Resuming payments will take a large amount of money out of consumers’ disposable income, and could impact future personal spending.
3. Resuming student loan payments could weaken the economy and have an impact on retail sales. About 40% of U.S. personal consumption expenditures are made up of retail sales. Retail sales may be negatively affected by the repayment of student loans, which could lead to a recession. This risk is often overlooked and could have a negative impact on earnings growth, as well as the valuations of stocks that are heavily dependent on consumer expenditure.
The end of the world is coming for millions of young Americans student loan payment moratorium This summer, the passage of the “Fiscal Responsibility Act” Raising the debt ceiling prevents the Biden Administration to extend the pause in student loan repayments, which has been in place since march 2020. Resuming payments will have significant consequences, considering the fact that there are almost $1.8 trillion of outstanding student loans with interest rates higher than those on current bank loan. Federal student loans, for example, have rates that range from 4.99% up to 7.54%. Private student loans, on the other hand, can be anywhere from just below 4% to nearly 15%.
The monthly payment is approximately $390. federal student loansThis affects approximately 15,5% of US adult population, and 32% in the 25-34-year-old group. Student loan payments will impact personal spending in future and this could have an adverse effect on the economy. Retail sales, which account for about 40% of consumer expenditures, are immediately affected as consumers have less money available to spend on services and discretionary goods. If Barclay’s Bank’s assumptions are accurate, retail sales will decrease. Retail sales are critical for economic growth, so this has a recessionary impact.
The abrupt increase in student loan repayments could force consumers of prime age to reduce discretionary spending. This would disrupt the robustness which has kept the economy from recession in the past. The restarting of student loan repayments could also pose a risk for cyclical stocks that are heavily dependent on consumers’ spending. This may impact companies like Apple Microsoft, and Amazon. A negative impact on earnings estimates in the future could cause a price correction for markets that are already overvalued. It is likely that the economy will face difficulties in resuming student loan payments. The market has not yet factored this into its assumptions about future economic growth and earnings rates.
