The suspension of federal student loan payments, which took effect at the height of the pandemic in 2020, expires late this summer. Interest will start accruing again in September. Payments will resume in October. The restart of those payments will force many people to start paying hundreds of dollars in loans each month — money they had been spending elsewhere for the past three years.
Any pain, instead, will likely be concentrated in a few industries, notably e-commerce companies, bars, restaurants, and some major retailers.
Even if all that won’t be enough to weaken overall economic growth, the shift in spending by many young adults could inject further uncertainty into an economy already beset by uncertainties, from whether the Fed will manage to tame inflation and halt its interest rate hikes to whether a recession is destined to strike by next year, as many economists still fear.
Josh Bivens, chief economist at the Economic Policy Institute think tank, suggested that the likely hit to the economy might amount to perhaps one-third of a percentage point of gross domestic product — the nation’s total output of goods and services — or about $85 billion or $90 billion a year.
It’s “not trivial, but it’s not huge,’’ Bivens said. “At the macro level, my guess is that it won’t be a game-changer.’’
The continued willingness of consumers to spend has kept the economy humming despite more than a year of dramatically rising interest rates. Consumers have had the financial wherewithal to load up Amazon shopping carts, go out for dinner and buy everything from lawn furniture to new refrigerators, partly because the government spent around $5 trillion since 2020 to cushion the economic damage from COVID-19.
The suspension of loan payments “had given people a bit more money in the pocket, and they’ve gone out and they’ve spent that money,’’ said Neil Saunders, managing director of the GlobalData Retail consultancy.
Deutsche Bank analysts who follow the retail industry estimate that the resumption of the loan payments could shrink consumer spending by $14 billion a month, or an average of $305 per borrower. The most significant blow, they say, will likely be absorbed by online commerce and mail-order companies and by restaurants and bars.
Despite everything, the economy has proved surprisingly durable. The government last week sharply upgraded its estimate of January-through-March economic growth to a 2% annual rate. It said consumers were spending at their fastest pace in nearly two years. Factor in a still-robust job market — employers keep hiring briskly, and unemployment, at 3.7%, is barely above a half-century low — and the economy has repeatedly outrun predictions, first sounded more than a year ago, that a recession was inevitable.