The Supreme Court’s decision to repeal President Joe Biden’s student loan forgiveness program for about 43 million people could hurt not only individual borrowers but also the U.S. economy. as billions of dollars of consumer disposable income is pulled out of circulation.
Bernard Yaros, economist at financial risk assessment agency Moody’s, told ABC News the ruling could spark a “modest headwind” to economic growth.
“None of this is enough to push the economy into recession,” Yaros said. “But this is definitely a hit.”
Total redirected to resume student loan payments will amount to $73 billion annually, or 0.27% of US GDP, Moody’s estimate. According to that analysis, Biden’s student loan forgiveness plan, rescinded by the Supreme Court on Friday morning, would halve that number.
So are the analysts at Goldman Sachs project that the macroeconomic effects of student loan forgiveness will be negligible.
Thomas Simons, an economist at equity research firm Jefferies, is more pessimistic than most: he believes that the resumption of loans could be the “tipping point” that starts a recession. quit.
“Consumers have run out of gas and they won’t be able to maintain their current rate of consumption,” Simons said. “This is an additional straw on the back of a camel. And it could be what gets us into a recession.”
Jefferies’ previous estimates were permanent Total student loan costs are $18 billion monthly, and it projects a 2% drop in consumer spending on non-essential goods. Simons emphasized that consumer savings have fallen during the pandemic, which, he said, adds uncertainty to the U.S. economy.
“The end of the ban would be a shock to a significant number of household budgets,” writes Jefferies economist Thomas Simons. “Households have had to resort to their excess savings to maintain their preferred level of consumption in the face of high inflation.”
In the days leading up to the decision, the Department of Education is completing a secure network phase that will allow borrowers more flexibility for three months after resuming payments. That transition could lessen the immediate impact of the resumption of payments, alleviating fears of a sudden “student loan cliff”.
“That should soften the impact on growth this year, but could push it back next year, depending on how well they can actually prolong this transitional relief,” Yaros said.
Hours after the ruling was made, Biden announced that the administration would create an “expedited repayment program” to help borrowers keep paying their loans in the fall.
This modest economic shock is expected to be heterogeneous for Americans of different incomes. A pause in student loan payments during the pandemic makes long-term borrowers more likely to mortgage their homes, improving their credit scores and reducing late payments on other bills. study from the Jain Family Institute found. The report adds that women and minority borrowers are the biggest beneficiaries of the measure, as these groups are more likely to struggle with student loan debt. increasing.
Yaros describes this change as a “normalization” from pre-pandemic levels. Laura Beamer, a researcher with the Jain Family Institute, found that the pandemic was the first time that peak student debt obligations decreased, rather than increased, over time. So, she said, a return to the pre-pandemic economic status quo will “not be a rosy picture” for borrowers.
“Before the ban went into effect, we were consistently seeing average and median student loan balances go up,” Beamer said.
On average, black borrowers in debt 95% of their initial student loans 20 years after signing up, compared with 6% for white borrowers – a fact Democratic congressional leaders were quick to cite to condemn the ruling. decide.
“Working Americans do not have the opportunity to complete their degrees and are not benefiting from the wealth of the relief-deserving generation. Congressman Jamaal Bowman said student loan forgiveness is a matter of racial and economic justice. “The burden that student debt places on families is enormous and unforgivable.”
On the other hand, Republicans point to the counterfactual possibility: that the student loan forgiveness plan would cause inflation to rise slightly, thereby reducing the amount of money in Americans’ pockets.
Senator Chuck Grassley tweeted: “Iowaians in 16 counties told me this week they are hurting after 2 years of record high inflation. “The last thing they need is a check for half a trillion dollars to pay off the Biden admin student loan transfer. The reality of that plan is not only financially insane but also unconstitutional.”
The Supreme Court has ruled on several other hot-button issues in the final days of his term, limiting affirmative action at universities and ruling that innovative businesses can refuse to serve. LGBTQ+ customer service due to First Amendment freedom of speech.