In case you missed the news last week, the Supreme Court officially ruled against President Biden's student debt forgiveness plan. The Biden administration had sought to forgive up to $20,000 per borrower in federal student loans, but at this point, that's not looking like a viable outcome.
The Supreme Court's recent ruling also means that student loan borrowers will need to gear up to start making payments this fall after a multiyear reprieve. Federal student loan payments were paused in response to the pandemic and the financial crisis it produced. But soon, millions of borrowers will have to resume their loan payments, and that has the potential to impact the broad economy in a negative way.
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Will recession fears come to life?
For months on end, financial experts have been sounding warning bells about a potential recession. While current economic conditions don't seem to be pointing to one, that has the potential to change once student loan borrowers are on the hook for regular monthly payments.
A big reason so many experts have been cautioning consumers to gear up for a recession is that the Federal Reserve has been extremely aggressive in its interest-rate policies, hiking up rates 10 times since March of 2022. The fear is that higher borrowing costs will lead to a pullback in consumer spending and Americans will cut back on purchases to take advantage of higher interest rates in their savings accounts, instead.
A notable decline in consumer spending most certainly has the potential to fuel a recession. But it's not higher borrowing costs alone that might cause that to happen.
Once millions of Americans are forced to start repaying their student debt, they're going to have less money to spend on other things. Americans might also be hesitant to take on more debt in credit card, home equity loan, or personal loan form once they're required to fork over thousands of dollars a year to their student loan servicers.
It's estimated that the average monthly student loan payment is $337. That's just over $4,000 a year. Multiply that by 43.5 million borrowers, and it's easy to see why resuming student loan payments could negatively impact the economy.
Of course, there's not much to do about any of this other than take steps to prepare for a recession. Shoring up savings is a smart bet since job loss and recessions can go hand in hand. Investors should also make sure their portfolios are well-diversified in case an economic downturn deals a blow to the stock market.
Now would also be a good time to put off large purchases that need to be financed -- due, in part, to the fact that borrowing is expensive, but also because no one needs an extra monthly debt payment at a time when the economy has the potential to slide.
Of course, it's not a given that resuming student loan payments will cause a widespread economic decline. But given the number of Americans who owe money in student debt form, it's also not an unreasonable conclusion to draw.
