Millions of people in the United States with federal student debt might have to readjust their spending this fall, when student loan interest and repayments are slated to resume after a three-year pause brought about by the COVID-19 pandemic.
And although the continuation of student interest accrual and loan repayments will certainly have a significant impact on affected households, a Wells Fargo report released this summer predicts it will deal a lesser blow to consumer spending overall.
“The resumption of payments is definitely a setback for individual households that hold student-loan debt,” said Shannon Seery, a Wells Fargo economist. “But it’s not enough on its own to cause overall spending to contract.”
The payment moratorium on student loans, which began in 2020, is one of many forms of fiscal support—like stimulus checks and enhanced employee benefits—to have provided households with extra cash flow and stimulate the economy during the pandemic.
“I do think that it was another factor that helped households spend at an above average pace,” Seery said. “And obviously, the expiration will impact individual households affected by student debt. But … I don’t think it’s a broad macro catalyst in terms of crushing the consumer.”
Stephen Miller, UNLV professor of economics and director of research for the Lee Business School’s Center for Business and Economic Research, said most analysts believe there’s at least another year’s worth of spending to come out of “excess savings” accumulated during the pandemic.
“The fact that some people were paying student loans and they didn’t have to make their monthly payment added to that additional saving,” Miller said. “But I would argue that it wasn’t a mammoth or huge component of that. What was more important was the government programs that put money in people’s pockets.”
Wells Fargo predicts that the U.S. will slip into a mild recession early next year due to weaker consumer spending, Seery said, but that outcome seems likely because of multiple factors affecting income—including the depletion of excess savings and a moderating labor market.
Thus, she continued, the resumption of student loan repayments seems less a catalyst for recession and more of a coincidence. Per the report: It’s correlation, not causation.
“I think it’s just one of many catalysts, or one of many headwinds, that’s going to be weighing on the household sector later this year,” Seery said.
Student loan repayments are nevertheless “not nothing” for the household sector, she said.
According to the report, economists estimate that the typical student loan payment is between $210 and $314 a month—or 4% to 5% of the annual median salary, which was $70,000 in 2021.
“I think that it will deter spending on traditional goods and services … so it will show up in that,” Seery said. “I think you’re going to see some weakness in overall spending; you’re not going to be able to continue to run at an above-average clip. But I think it’s just going to take some time.”
Looking at the ideal life cycle of family finances, Miller said, individuals typically accumulate debt when they’re young and don’t have enough income to cover certain expenses, before hopefully paying off that debt in their middle age and then living on savings from over the course of their life in retirement.
“So, student loans are just one part of the debt issue that young people take on as they start their working life,” said Miller, who noted that enrollment just recently opened for Saving on a Valuable Education (SAVE), a new, income-driven repayment plan from the Biden administration.
Ultimately, Seery said, while student loan debt has grown exponentially compared with other debt categories, it’s still concentrated among a relatively small number of U.S. households compared with the entire population and is not yet a “systemic risk.”
“This is a burden for many people in that, yes, this is an issue that needs to be addressed,” she said. “But it’s not a systemic issue to the household sector at this point.”
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