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Is the Restart of Student Loan Payments the Final Blow for Consumers?

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Is the Restart of Student Loan Payments the Final Blow for Consumers?

Mykail James is making plans for when she has to resume payments on her $75,000 student loans next month. She intends to reduce her spending on travel, concerts, and Christmas gifts to manage her tighter income. Approximately 27 million borrowers, including Ms. James, will have to start repaying their federal student loans in October after a three-year break. While the impact on the economy could be significant, economists do not believe it will lead to a recession. Goldman Sachs analysts predict that renewed student loan payments will cost households around $70 billion per year and could subtract 0.8 percentage points from consumer spending growth in the fourth quarter. However, there are uncertainties surrounding the size and timing of this impact. The Biden administration has implemented measures to ease the burden, such as allowing lower-income individuals to repay loans more slowly and instituting a one-year grace period where missed payments will not be reported to credit agencies. Nevertheless, the restart of student loan payments coincides with other challenges, including shrinking savings, a cooling job market, rising inflation, and potential strikes and government shutdowns. Retailers, such as Walmart, Macy’s, Best Buy, and Gap, have expressed concerns that student loan payments could place additional pressure on consumers’ budgets, impacting sales. Many consumers, like Mykail James and Phil Esempio, who owe significant amounts in student loans, are expecting to make adjustments in their spending habits, potentially affecting the entertainment and retail sectors. However, some economists believe that their projections may be overly pessimistic, as borrowers may enroll in income-based repayment programs, delay payments during the “on-ramp” period, or have enough financial flexibility to manage the resumption of payments. Nonetheless, lower-income individuals and Black borrowers, who hold a disproportionate amount of student debt, may face greater challenges. Overall, while the restart of student loan payments will have an economic impact, it is not expected to cause a recession.

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