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Will Student Loan Debt Create Another Economic Speed Bump?

Will Student Loan Debt Create Another Economic Speed Bump?

July 31, 2023

Many of you know that my wife Rachel’s mom, Eveline, moved to a retirement community south of Guadalajara, Mexico, four years ago in the summer of 2019. She has a beautiful home with a view of Lake Chapala in the ex-pat retirement community of Ajijic, Mexico. It is a town of a little more than 10,000 people. Roughly half of the people there are Mexican nationals, and the other half from more than 20 different countries. It is truly a multicultural community, which suits my beautiful mother-in-law very well. A couple of pictures below will help you visualize the area.

One thing that they do not have many of in Ajijic, other than at the main intersections, is traffic lights. In order to slow the speed of traffic, the town has installed speed bumps throughout the major thoroughfares. It would be detrimental to both your back and your car to try to drive too fast in these areas. And you definitely cannot drive fast on the old style, cobblestone side streets.

According to the Cambridge dictionary, “a bump in the road” is defined as something that delays progress or prevents it from developing. The economy has hit a series of speed bumps over the last six months, which has had many economists predicting the onset of a recession for nearly a year. 

These "speed bumps" include persistent and elevated inflation, the Federal Reserve Bank raising interest rates aggressively to combat said inflation, regional bank failures, and the debt ceiling crisis, which consumed much of the oxygen in the room during the month of May.

However, an economic speed bump that has not been talked about so far, is the end of the student loan payment moratorium coming up at the end of summer. Congress passed, and President Biden signed into law the Fiscal Responsibility Act in early June to raise the debt ceiling. A provision in the act prohibits the Biden administration from any further extensions of the pause on student loan repayments, which have been in place since the onset of the COVID-19 coronavirus outbreak in March 2020.

Today’s discussion is not about the merits of student loan repayments, it is about the economic impact of more than 40 million Americans resuming making payments after a 39 month pause. While this may not sound like a big deal, the cumulative effect on the economy could be huge. Money spent on loan payments is money that cannot be spent to help drive economic activity and growth.

First of all, at the end of the first quarter of this year, there was almost $1.8 trillion of student loan debt outstanding, as you can see in the chart above. A recent analysis that assumes a 10-year payment schedule and a 5.8% interest rate calculates that the average monthly payment across all debt holders would average $390 per month, as you can see in our second chart below.

This totals $15.8 billion in monthly federal student loan payments. It affects nearly a third of people ages 25 to 34. Evidence confirms that certain economic data points, such as surprisingly strong retail spending over the last couple of years, has been supported by people not making these debt payments. Please remember that nearly 70% of the US economy is driven by consumer spending and that retail sales make up approximately 40% of the spending. Removing the student loan moratorium on payments could significantly impact future retail sales, thus slowing economic growth.

One last data point for your consideration. A recent study from the New York Fed showed that if the average student loan payment of $393 per month was skipped for 39 months in a row, the result would be approximately $15,300 of additional discretionary income over this time. When compared to Federal stimulus checks and enhanced unemployment benefits, this has been a huge and underreported source of cash for people holding, but not making payments on their student loans.

We wanted to share this information with you so that you had some perspective on an economic speed bump that has not been widely reported… yet. We will have to watch the data flow carefully this fall and winter as these payments restart, to see what the impact on the economy and retail sales might be. We are always on the lookout for issues that could impact the hard-earned financial resources and investment assets of you, our trusted friends and clients. As always, please feel free to reach out if you have questions, or to share this with people who you think might benefit from the information and knowledge we strive to share. It is part of our mission and what drives us to keep "Moving Life Forward".

© 2023 Jesse Hurst

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