This morning the United States Supreme Court ruled against the Biden Administration’s plan to forgive up to $430 Billion in student loan debt. In a 6-3 decision, the court disagreed with the White House that the proposed forgiveness plan was merely a modification of an existing program. Chief Justice Roberts said, “the Secretary’s plan has ‘modified’ the cited provisions only in the same sense that the French Revolution ‘modified’ the status of the French nobility—it has abolished them and supplanted them with a new regime entirely.” The court noted that such a wholesale change in the student loan program would require congressional approval.
We’ve been thinking about student loans a lot over the past month as the Trump era payment deferral program is set to expire in October. You’ll recall that in March 2020, the Trump Administration paused all Federal Student Loan payments and the accrual of interest on unpaid balances. This was supposed to be an emergency relief program but has been extended many times since. We wanted to understand just what kind of impact the resumption of student loan payments might have on the economy—this is the result of our research.
Student Loan Information
As of the end of Q1 2023, total student loans outstanding were $1.774 Trillion—up 1.53% from the year end balance of $1.762 Trillion. Nearly 93% of student loans are Federal Student Loans—meaning the lender is the government.
Student loans are the second largest household debt in the country behind mortgages. This massive debt load is shared by 43.6 million borrowers with the average Federal Student Loan debt at $37,600 per person.
Economic Impact of Student Loans
Economic research has identified several negative impacts of student debt on the wider economy.
- Reduced consumer spending
- Restricted small business creation
- Delayed or eliminated household formation and home purchase
Consumer Spending
In an October 2019 paper by Bahadir and Gicheva, they calculated that a 1% increase in the Student Debt to Income Ratio resulted in a decline of 3.7% in consumption. Obviously, this makes sense to us. If a lot of your income is directed to student loan payments, you don’t have money to spend on other things. In a survey by the government before the payment suspension, they noted that 18% of borrowers found it difficult to buy daily necessities due to their payments. As we noted before, this drag on consumer spending isn’t just related to the 20-something borrower. Research has found that this reduction in spending can last several decades as half of student borrowers still owe over $20,000 twenty years after leaving school.
Home Purchase
Consumers with student loans on average have lower credit scores and are more likely to live with their parents or rent than those without student loans. The biggest obstacle to purchasing a home for most people is saving for a downpayment. In a recent Apartment List survey, they found that those without student loans have more than twice as much saved for a downpayment than those with student loans. In the same survey, over 12% of respondent said that they didn’t think they would every be able to buy a home with student loans being a major factor in their analysis.
Punchline
In October, 43.6 million people will resume student loan payments. This will immediately drain over $263 Billion from consumer spending or nearly 2% of consumption—no wonder the government has continued to extend the payment forgiveness. Borrowers will have to continue spending on rent, food, healthcare and other necessities, but discretionary spending could take a meaningful hit.
The student loan problem makes us even more optimistic on rental housing over the long-term. Now that payments will resume, fewer renters will be able to save enough to purchase their own home thus keeping occupancy and rents higher than they otherwise would have been.
The student loan crisis is pretty depressing to think about, but we believe its important to understand how it impacts the economy.
