In early 2020, the U.S. economy was upended by the pandemic, and millions of workers found themselves out of a job. Lawmakers were quick to provide relief to the public by doing things like putting a moratorium on evictions, boosting unemployment benefits, and sending out stimulus checks to keep the economy going.
Another step lawmakers took to provide relief was to pause federal student loan payments. In fact, that pause remained in effect for more than three years, giving borrowers an extended reprieve.
But starting this month, borrowers with federal student loans are obligated to make payments on that debt once again. And that's apt to upend a lot of people's finances.
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The obligation to make student loan payments also has the potential to impact the economy in a very big way. And that's something workers and investors should be mindful of.
Will student loan payments drive the U.S. into a recession?
The average person with student debt owes $337 a month. And a good 43.5 million Americans owe money in student loan form.
So all told, starting this month, it's conceivable that billions of dollars will be spent on repaying student debt instead of being spent on consumer goods and services. Multiply this month by many months, since student debt doesn't seem to be on the verge of just going away, and it's conceivable that over time, the economy could start to suffer in a very big way.
A big reason the economy has flourished over the past couple of years is that consumers had stimulus funds to spend at a time when student loan payments were on pause. But now, many people have run out of stimulus money and they're on the hook for thousands of dollars per year in student debt payments. It's not such a favorable combination.
Prepare for a recession and watch your portfolio
While resuming student loan payments could negatively impact the economy, that's not guaranteed to happen. However, it's a possibility consumers should gear up for.
A good way to do that is to build up emergency savings. That means having funds outside of your 401(k) or IRA that you can tap in a pinch, such as if you were to lose your job as part of a broad economic downturn.
Furthermore, if you have a portfolio that includes retail stocks, travel stocks, and other stocks that have the potential to lose value during a recession, you may want to make sure you're nice and diversified. If consumers are forced to start cutting back on discretionary spending, they're going to stop taking trips and buying clothing before they stop putting gas in their cars and food on the table. You may want to make certain your portfolio has at least a few relatively recession-proof stocks, like healthcare.
There's no question that many student loan borrowers will struggle to repay their debt after a multi-year pause. A bigger question is how much of a hit, if any, the broad economy will take now that those payments are back on the table. Ultimately, only time will tell.
