Joe Biden has shielded more than 40 million Americans from having to repay any of their student loans for his entire presidency — so far.
But as that hiatus nears its end, tens of millions of households are bracing for the resumption of student loan payments this fall, just as the White House ramps up its effort to sell Americans on the economy's resilience.
A range of economists and Wall Street analysts are predicting that consumer spending could take a hit as payments return for the first time since the pandemic reprieve began more than three and a half years ago.
"This will be a significant additional obligation that could lead to broader credit distress among the household sector, and potentially change some spending patterns in certain segments of the population," Rohit Chopra, the director of the Consumer Financial Protection Bureau, said in an interview.
Millions of borrowers who are set to resume repaying were hoping to have their debts significantly reduced or eliminated completely by Biden's student debt relief plan before it was struck down by the Supreme Court last month. That disappointment — and the financial sting of new payments — could undercut the president's ability to convince voters that they're doing better under his stewardship of the economy.
"If you're the incumbent, then ultimately, part of an election is just a referendum on the economy," said Alec Phillips, the chief political economist at Goldman Sachs. "It doesn't really matter who is responsible for what. If people are unhappy, then they're going to take it out on the incumbent."
The full economic picture of restarting student loan payments remains unclear, but most economists and analysts don't see the added stress on household finances translating into a major risk to the broader U.S. economy.
Phillips, who ran the numbers for Goldman Sachs after Biden announced the relief plan last year, said it would only chip a couple of tenths of a percentage point off of total consumption. "It's probably not a huge effect," he said.
Moody's Analytics published a report earlier this month warning that restarting payments could represent a "major financial shock" for many borrowers, potentially trimming a quarter of a percentage point from GDP.
Jared Bernstein, Biden's top economic adviser, said the administration believes the effects of restarting student loan payments will be "small enough that they shouldn't be felt in the overall macro economy." He cited a 0.3 percent drop in annual consumer spending that reduces GDP by 0.2 percent as the "high-end estimate."
"We've looked at this pretty carefully, and we've found that the economy — which is manifesting some pretty solid underlying strength and momentum — can handily absorb the restart, especially given the ramp-up that the president put into place," Bernstein said in an interview.
Biden announced last month that the Education Department would not report borrowers to credit bureaus if they fail to make payments during the first year, though interest would continue to accrue on their debt during that forbearance.
For individual households, the resumption of payments amid “the strongest labor market in generations” will help offset some of the costs, Bernstein said. “There are a lot of tailwinds that are helping the American consumer even as restart begins,” he added, citing declining inflation and a rise in real wages.
“We’re in a good place to do this, but that doesn’t mean we’re going to stop fighting for debt relief for people who the president has long believed deserve it,” Bernstein said.
Biden and other administration officials have been talking up their economic track record all summer. While Americans have given him low marks on his stewardship amid elevated inflation, the strong labor market and steady wage growth — particularly for lower-income workers and those in the middle — have kept the economy growing despite much higher borrowing costs.
The Federal Reserve has raised interest rates by more than 5 percentage points since early 2022, a pace that historically has pushed the economy into a recession. But while the data suggests households are still faring well — unemployment is low, savings rates are up and consumer confidence has improved — economic unease continues to dog the White House.
The president’s approval rating is underwater and the economy remains a top concern for Americans, according to a Reuters/Ipsos poll released earlier this month. Barely a third of those surveyed in a recent Associated Press-NORC Center for Public Affairs Research poll approve of the president’s economic leadership.
Still, it’s far from clear if voters will ultimately hold Biden responsible for any financial challenges that might arise in the aftermath of the Supreme Court’s ruling. The same Reuters/Ipsos poll from earlier this month found that respondents were split on the court’s student loan decision, and a recent Generation Lab survey found that younger Americans are blaming the court and conservative policymakers for their debt balances.
“When [households] have unexpected health expenditures, we see them pull back from spending. When they have a tax refund, we see them tick up in spending,” said Chris Wheat, the president of the JPMorgan Chase Institute.
“Families are very responsive to that sort of change, very unexpected or somewhat unexpected changes in income for spending,” he said. “We’ve seen that with other phenomena enough to wonder whether that's going to happen when student loan payments resume.”
Biden administration officials have been preparing for months for the restart of student loan payments. Prior to the pause, the Federal Reserve found that the typical student loan borrower paid between $200 and $299 each month.
White House and Education Department officials are preparing emails and other communications to borrowers as the agency gets ready to send out bills in the coming months. Interest on federal student loans will resume Sept. 1, and borrowers will have their first payment due date at some point in October.
The Education Department has already taken steps to essentially remove the most severe consequences of borrowers falling behind on their payments or missing them completely for the first full year that payments resume. Borrowers won’t face the federal government’s harshest debt-collection tools — such as garnishment of wages, tax refunds and Social Security benefits — until the fall of 2025 at the earliest.
And the Education Department this summer will implement part of Biden’s new student loan repayment plan, which lowers or even eliminates monthly payments and interest for some low-income borrowers who opt into the program.
Even before payments resume, recent research from the Consumer Financial Protection Bureau found that a growing number of student loan borrowers are behind on other forms of debt. Strikingly, the addition of a monthly payment to household expenses will meaningfully affect household finances — particularly for middle- and upper-middle-class households — according to research published by the Bank of America Institute earlier this month.
BofA’s research found that, with the exception of those with $251,000 of annual income or more, households would spend more than their monthly incomes if they add a $180 student loan payment to the mix.
Most households have enough cushion to absorb the blow, but it would likely force them to chip away at their savings or temper their discretionary spending to do so, BofA Institute economist Anna Zhou said.
The labor market within higher-income sectors — particularly financial services and technology — is starting to tighten, she said. Injecting a monthly student loan payment into the mix will likely add “another downside risk to spending” for those households, Zhou added.
The Biden administration is racing to advance another plan to cancel student debt after the Supreme Court rejected its first attempt. But the regulatory process to craft a new program, which began this week, is set to take months and won’t be ready before payments resume.
Some progressives are asking the administration to move more quickly to deliver on debt relief.
The AFL-CIO, NAACP, Student Borrower Protection Center and other groups pushing for debt cancellation said in a letter to Biden last week that they worried the restart of payments before canceling debt “will only exacerbate already dire economic situations for millions of American households.”
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By: Michael Stratford and Sam Sutton
Title: Restart of student loans clouds White House ‘Bidenomics’ push
Sourced From: www.politico.com/news/2023/07/27/biden-student-loans-bidenomics-00107601
Published Date: Thu, 27 Jul 2023 03:30:00 EST
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