Researchers at the Federal Reserve Bank of New York are predicting that student loan repayments won’t pose a huge headwind for the economy based on a small survey of borrowers.
The study released Wednesday found that the restart in loan payments would reduce borrowers’ spending by $1.6 billion a month, or down 0.1 percentage point from August levels. Delinquency rates would also eventually return to pre-pandemic levels.
“We expect the potential spillover to the broader economy to be limited, and we will continue to monitor developments in the coming months,” the researchers wrote.
The findings come as retailers, borrower advocates, and others worry about the potential ramifications of repayments after a 43-month pause.
Read more: Worried about student loan repayments resuming? These programs could help
The study used the SCE Household Spending Survey that the New York Fed fields every four months. In the August 2023 edition, the researchers added special questions about student loan repayments. Of the 1,000 respondents, 225 had outstanding student loans and 151 of those indicated their federal student loans were previously paused, but will be entering repayment.
Pandemic forbearance gave borrowers over $260 billion in waived payments that went to other spending and savings over the last three years, the study found. After the pause, borrowers on average expect to cut back their monthly spending by $56 from their monthly average they reported in August.
That jibes with a September survey of 402 student loan borrowers from New York Life that found that 23% reported they would cut back on lifestyle expenditures. That also echoes concerns by a handful of retailers. Target and Walmart execs have recently noted they’re keeping an eye on consumer behavior after payments resume.
The New York Fed study also found that borrowers said there was a 22.6% probability they would miss a student loan payment, which the researchers noted was similar to the pre-pandemic delinquency rate of 23%. The New York Life survey found that a higher percentage of Americans with student loan debt — 27% — say they’re not sure how they will be able to repay their loans in October.
The Fed researchers said they expect missed and late payments to be a bigger issue for women, low-income borrowers, and those who didn’t get a degree but still have student loan debt.
“We don’t want to downplay the hardship,” the researchers said in a press briefing on Wednesday.
As for other debt payments, borrowers in the New York Fed survey reported a 11.8% increase in the likelihood of missing one of those payments because of student loan repayments. Many borrowers have greater debt obligations now than before the payment pause.
More than half (53%) of borrowers got a new credit card, over a third (36%) took on an auto loan, and 15% now have a mortgage or personal loan, according to a recent TransUnion study.
“These additional credit products mean additional monthly payments, the accumulation of which may pose added challenges for households attempting to reintegrate student loan payments into their monthly budget,” said Liz Pagel, consumer lending business leader at TransUnion, in the study.
Despite the struggles that some borrowers reported, the researchers pointed out the overall impact would be curbed due to a number of factors.
The on-ramp that the president announced this summer won’t report missed or late payments to the credit reporting bureaus for 12 months, so borrowers’ creditworthiness won’t get dinged.
The Biden administration has also canceled $127 billion in student loans for 3.6 million borrowers as a result of public service loan forgiveness, cancelation under income-driven repayment plans, and disability and borrower’s defense discharges.
The researchers also found evidence that some borrowers resumed payments soon after the Supreme Court struck down the up to $20,000 in loan forgiveness in June. Daily deposits to the US Treasury from the Department of Education — the bulk of which are federal student loan payments — increased after the ruling. The researchers hypothesize that some of the expected reduction in spending has already occurred.
They also expect President Joe Biden’s new income-driven repayment plan will reduce monthly payments and waive unpaid interest for low-income student loan borrowers. The study estimated that 58% of borrowers will be enrolled in an income-driven repayment plan after the pause, compared with 50% pre-pandemic.
Read more: How to apply for IDR forgiveness
Still, there are headwinds on that front.
To date, the majority of borrowers enrolled in the president’s new plan are those that were automatically transferred from an older repayment plan. New enrollees to the new plan are relatively low. Additionally, borrowers have experienced problems trying to enroll in SAVE and reach out to loan servicers.
Recently, a Student Debt Crisis Center surveyed found only 20% of respondents feel they have the information they need to prepare for the resumption of payments, and 27.5% have not received any recent communication from their loan servicer.
“I know firsthand that the information borrowers receive from their loan servicers is sporadic at best and not always wholly accurate,” said Sabrina Calazans, managing director of the SDCC, in a press statement. “We hear from borrowers daily who are struggling to not only navigate the system, but to even know where to start.”
Ronda is a personal finance senior reporter for Yahoo Finance and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda.
Click here for the latest personal finance news to help you with investing, paying off debt, buying a home, retirement, and more
Read the latest financial and business news from Yahoo Finance
Credit: Source link
