It’s October, and for millions of Americans, a familiar interloper has slid its way back into that pile of monthly bills: The federal student loan payment, which is resuming after a three-year reprieve.
Economists say the loan payments alone aren’t expected to dent the economy. Instead, they’re more likely to deliver a small ding, thanks in part to recently launched federal repayment programs and forgiveness efforts that are blunting the initial impact.
However, they’re also returning at a time when consumer headwinds are picking up speed: Interest rates are sky high, debt is mounting, delinquencies are growing, inflation pressures remain, and the job market and wage growth have slowed considerably.
As such, many households are now having to shoehorn payments that are hundreds of dollars in size into already snug monthly budgets.
Something has to give.
“I think somewhere I’ll tighten up and spend a little less on groceries, but I don’t really know yet. Honestly, I go month by month,” said Justine Lyons, 49, of Decatur, Georgia. “I do have a little spreadsheet, where I lay it out a month or two in advance — and the next three months, they don’t look so good. Every month coming up looks tighter and tighter.”
‘Will find a way’
The pandemic-related payment pause was transformational for many households, allowing them to buy homes, start families, pump money into the economy and pay down — or even pay off — those pesky and often hefty educational debts.
For households like the Lyonses, it was helpful in getting food on the table. The monthly sum not going toward repayment instead was absorbed by the highest inflation the United States has seen since the early 1980s.
Before the payment pause, Lyons had outstanding student loan debt totaling just under $40,000 and a monthly payment of nearly $300 a month, which was “not as bad as some, I know,” she said.
Still, for her situation — being a single mother for the past 10 years, raising three daughters (now aged 11 to 19) — Lyons knows that every penny is spoken for.
“It’s almost a little degrading, because I’m 49 years old, and I still feel like I’m scraping by,” she said. “Because every time you think you’ve got your foot stable, inflation goes up, the car insurance goes up, the groceries are just out of control.”
And now, the student loan payment is back in the mix.
When Lyons first ran the online calculator to estimate her expected loan payments, the system spat back a total that was tough to stomach: $380 each month. Cobbling that amount at this point in time would have been next to impossible, she said.
Fortunately, Lyons qualified for the newly launched Saving on a Valuable Education income-driven repayment plan, which dropped the monthly bill to about $150.
“I can do that,” she said. “It is stressful, for sure, because it’s just one more payment to take on and find somewhere, but I try not to dwell on it, and I will find a way to make it happen.”
‘Things could be much worse’
About 43.4 million Americans have federal student loans, collectively amounting to $1.63 trillion of debt, according to the National Student Loan Data System.
Prior to the pandemic, student loan debt was the fastest-growing category of household debt, and vaulted from a 3% share in 2003 to 11% in 2018, according to Federal Reserve Bank of New York data.
The payment pause helped to cut that back down. Through June, outstanding student loans accounted for just over 9% of overall household debt (mortgages, understandably, account for the bulk of it, at 70%).
At the same time, Americans’ wealth grew during the past three years as spending was curtailed, the financial stimulus checks helped pay off a little debt, wages grew, the job market surged and the refinancing boom yielded $430 billion for 14 million households, New York Fed research shows.
“I think households are better equipped to handle this than they would’ve been before the pandemic, before the stimulus programs,” said Emerson Sprick, senior economic analyst with the Bipartisan Policy Coalition. “Of course, the lowest-earning households still collectively owe around $7 billion a year in student loan repayments. And for lower earners, that’s going to be hard.”
The Biden administration has sought to ease the blow by canceling millions of loans and launching the SAVE repayment plan. Especially in the short run, fewer households should face an immediate crunch, Sprick said.
“Unequivocally, things could be much worse,” he said.
A slight hit to spending
The same goes for the overall economy.
The resumption of student loan payments is expected to shave off 0.4% to 0.6% from total annual consumer spending, said Shannon Seery, an economist with Wells Fargo.
“So that’s relatively small, when you think about that broken out on a monthly basis,” she said.
Some recent economic data does provide a window into that potential effect.
After the Supreme Court dashed any hopes of loan forgiveness, more Americans started making loan payments before the official repayment period, as well as interest, kicked in.
In August and September, the Department of Education recorded deposits of $6.4 billion and nearly $7 billion, respectively, according to Treasury data. By comparison, the Education Department recorded $13 billion in deposits for the entire 10 months prior, the data shows.
In August and September, consumer spending moderated only slightly.
“We still maintain the view that the student loan issue isn’t the straw that’s going to break the camel’s back here,” Seery told CNN. “It’s another burden, and it’s coming at a time when the household sector is more financially vulnerable.”
Oxford Economics estimates that the impact to economic growth would be relatively small, subtracting 0.1% from GDP this year and 0.3% next year.
“I think the economy’s in a better position to withstand this than we might have thought, but I do still think it’s one thing that’s going to contribute to a slowdown of economic growth as the year winds down,” said Nancy Vanden Houten, senior economist at Oxford Economics.
Prior to the pandemic, Brian Snyder and his wife were paying $615 a month between them on their student loans.
During the payment pause, the Snyders initially socked away all the extra money, as they didn’t know how fleeting it would be nor how safe their jobs were during the incredibly uncertain and volatile early stages of the pandemic.
“As it became more apparent that wasn’t going to be the case, but also the rumbling about the potential of the student loan forgiveness, then we started spending it,” said Snyder, 34, of Baltimore, Maryland. “We bought a camper, we went on vacation more, started going back out to eat a little bit more.”
Now that payments are restarting, the $615 is returning to the mix. While it shouldn’t cause any significant hardship, Snyder said, it will mean that fewer camping trips will be taken, dinners out will be cut back and other discretionary purchases won’t happen.
“It’s just all the supplemental spending, a lot of that will disappear so that we can make room for the [student loan] payments,” he said. “I think with the way the economy is, having that money go back into the economy in the ways of spending, I think would be really helpful. So, it’s unfortunate [forgiveness] didn’t happen.”
About 2,500 miles west, in Las Vegas, Megan Lopez, 33, was told she’ll qualify for the SAVE program, which could likely bring her payments down by nearly $400 a month to under $200.
However, the everyday cost of living combined with the mounting toll of inflation, rising insurance and child care costs means she and her family are “squeezing pennies from absolutely everywhere” and feeling increasingly worried about how much they’ll be able to spend during the holidays, she told CNN.
“It’s helpful for sure, because we could be paying more,” Lopez said. “But at the end of the day, it doesn’t get rid of the debt. And based on the cost of everything else, it just feels like you’re just barely staying above water.”
Staying the course
In Cedar Park, Texas, the payment pause put on hold $800 of a monthly $1,200 student loan bill for Logan Ricketts and his wife, Jamie.
The Rickettses, who before were living “straight paycheck-to-paycheck,” were able to get some breathing room, pay down the credit card bills and saved up enough to buy a home.
In recent months, they’ve tucked away a couple hundred dollars a month, put a good chunk of money toward home repairs and spent a smaller share on experiences such as concerts, date nights and taking some adventures with their two kids. For now, they’re staying the course on those spending patterns in part because the SAVE program reduced monthly payments.
“Little adventures,” Logan said. “No big adventures, because all that money is really just tied up in the house at the moment.”
Jonnisha McCleod, 29, of Omaha, Nebraska, initially held off on making her $200-a-month student loan payment during the pandemic pause until a conversation with her mother changed her approach.
“My mom said, ‘If you have the money, you need to pay for it; you didn’t lose your job, pay it off while you don’t have to pay any interest on it,’” McCleod said. “Because she herself also had student loans and said, ‘you don’t want to be like me and have student loans for 20 years.’”
Not knowing how long the pause would last, McCleod kept making those payments and then some: With a growing desire to be debt-free, she paid extra when she could, even allocating her tax refunds to the cause.
By March of this year, that $12,000 debt was wiped out.
If she still had to pay $200 per month, “it would be a big stressor, because I’m not a super-rich person,” she said. “I’m not living paycheck to paycheck, but I don’t have an exorbitant amount of money to spend on debt and things like that. So that’s why I am happy that I am debt-free, so I don’t have to worry about that.”
Now in that position, she can continue paying for her Master’s program, saving for her first home, and spending a little every once in a while on experiences like dining out.
A new beginning
In the fall of 2019, Katrice Williams started a part-time law school program in pursuit of her dream as well as a desire to build wealth and stability for herself and her daughter.
But the single mother, who worked full time and applied for scholarships to defray as many costs as possible, was starting to buckle under the crushing weight of student loan debt incurred years before.
Williams couldn’t get ahead of the compounding interest that had ballooned her Master’s program debt to $91,000 from $79,000. And combined with $18,000 from undergrad, she was faced with a burdensome — and growing — $108,000 bill.
“In December of 2019, I was just really fed up,” said Williams, 36, of Cleveland, Ohio. “I felt like no amount of payment was going to pay this down.”
She started driving for UberEats part time in January 2020 in the hopes of putting those funds toward the student loan debt.
Two months later, she got a welcome respite when the pause button was pushed on those payments and that snowballing interest. During the Trump and Biden administrations’ payment relief pauses, Williams was able to pay down the debt by $87,487.03 ($16,000 of which came from landing a First Aid Beauty scholarship to wipe out undergrad debt).
Without the pause, Williams estimates she would have incurred more than $450 per month, or nearly $19,000, in interest alone. She also believes she was able to avoid having to take out loans to pay for home or car repairs, and she was able to build an emergency savings fund as well as a college savings fund for her daughter.
The pause benefited Williams’ “ability as a self-employed, disabled, African American woman to build a little more wealth and save for my daughter’s future,” she said. “If there were debt cancellation, it would be the biggest game-changer for closing the racial wealth gap, and I could substantially accelerate my financial independence.”