Student loan borrowers were able to enjoy an extended reprieve when their monthly payments were put on pause during the pandemic. In fact, borrowers were able to go more than three years without making payments on federal loans before payments resumed this month.
At first, there was some concern that the revival of student loan payments would have a negative impact on the economy. After all, with an average monthly payment of $337, borrowers were apt to start cutting their spending in different areas to cover their loan obligations, right?
Well, apparently not. A new analysis from JPMorgan finds that resuming student loan payments isn't hurting the economy in a big way. And that's a relief for those who may have been worried about a recession.
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Not an unfounded fear
Economists spent much of 2022 sounding warnings about an impending recession. To be fair, those concerns stemmed largely from rampant inflation and the Federal Reserve's incessant interest rate hikes, not the eventual reintroduction of student loan payments.
But once it became clear that President Biden was not going to be successful in wiping out student debt, some concerns did arise about the impact of resumed payments on the economy. The logic was that if consumers were suddenly going to be spending thousands of dollars on an individual basis on loan payments, they'd have less money to spend elsewhere. But so far, consumer spending does not seem to be on the decline.
That said, it may be a bit premature to state that the resumption of student loan payments won't have any negative impact on the economy. We're only in the first month of those payments being back in the mix, and borrowers had ample warning that payments were going to be due in October. It may be that many conserved cash specifically to start payments off again on the right foot.
We might also see consumer spending hold steady in the coming months due to the usual holiday shopping boom. But in the postholiday season months, consumer spending has the potential to wane once the impact of student loan payments hits harder.
There are other factors to consider, like interest rates. Borrowing costs have remained stubbornly high this year. If the Fed doesn't cut rates in the near term, we could see consumer spending decline as 2024 moves along.
A positive sign
The fact that student loan payments aren't hurting the economy so far is a good thing. But whether that trend continues is yet to be determined.
In the coming months, the strain of having to keep up with those payments might force consumers to make notable changes to their spending -- either that, or risk falling delinquent on their payment obligations. However, if consumers get relief in the form of lower interest rates, that might help offset the blow of ongoing loan payments.
All told, it's too soon to say with certainty that student loan payments won't hurt the economy. All we really know is that they aren't hurting the economy so far.
