Student loan payments are starting again. How will it affect the economy?

“The 360” shows you diverse perspectives on the day’s top stories and debates.

What’s happening

Student loan payments are set to resume for millions of borrowers starting next month after a three-and-a-half year pause that began in the early stages of the coronavirus pandemic.

Payments and interest on federally held student loans were frozen in March 2020 as a way to offer relief to Americans reeling from the shock of widespread economic shutdowns. Initially planned to last only six months, the pause was extended by former President Trump and kept in place by President Biden as the courts considered his proposal to forgive up to $20,000 in student debt for borrowers making less than $125,000.

The Supreme Court declared that plan unconstitutional in June. Earlier that month, Congress passed a bill ordering the administration to end the payment pause for good. Interest on federal student loans began accruing again at the beginning of September and the first payments will be due in October.

Biden has vowed to keep trying to forgive a large share of Americans’ $1.7 trillion in student debt, but has said his second effort will take longer than his initial plan. In the meantime, his administration has offered targeted relief to specific groups of borrowers totaling more $116 billion. He has also implemented new programs to ease the financial burden of renewed loan payments, including an “on ramp” to keep people who miss payments from defaulting and a much more generous income-based repayment plan that could save borrowers as much as $475 billion over the next 10 years.

Why there’s debate

It’s clear that at least some borrowers will have a tough time making ends meet once they’re faced with the added expense, but experts are divided on what the resumption of student loan payments will mean for the economy as a whole.

Some economists fear that having 45 million people spending hundreds of dollars a month on their debt, rather than using that money on goods and services, could cause real damage to industries that depend on people having cash to spend. Others say a huge share of Americans are already in a precarious financial position and the extra burden of loan payments could lead to a spike in defaults on other forms of debt like car loans and credit cards. In the worst-case scenario, they argue, these combined headwinds could be enough to bring about the recession that the economy has avoided until now.

But optimists say the total amount of student debt payments, about $70 billion a year, is too small to have any major impact in a $25-trillion economy. Some argue that ending the pause will even have positive effects, including helping tame stubbornly high inflation and curbing the troubling increase in risky forms of debt that many Americans took on while they didn’t have to make student loan payments.

What’s next

While the broad economic impacts could take months to materialize, there are also immediate concerns that confusion and logistical hurdles could lead a lot of borrowers — many of whom may not know how to make their payments or even how much they owe — to miss payments once they become due.

Perspectives

The economy is in too vulnerable of a place to absorb this added setback

“High mortgage rates are putting homeownership out of reach for many. And an extra bill for those with student loans — $400 a month on average before the pandemic — could be a financial tipping point for a lot of households already reeling from higher rent, energy and food costs due to inflation.” — Claire Ballentine, Bloomberg

The repayment pause has to end, so inflation can be brought under control

“At the moment, unemployment is low and inflation is way too high. More fiscal stimulus is the last thing the U.S. economy needs right now.” — James Hamilton, UC San Diego economics professor, to San Diego Union-Tribune

There could be some positive effects, but they’re likely to be small

“There’s an optimistic scenario in which kick-started student-loan bills help create a domino effect of virtuous scenarios: lower inflation, lower interest rates, more affordable stuff, everybody’s happy. In reality, it won’t be that simple. Still, the resumption of student loan payments is probably not going to be so bad.” — Kevin T. Dugan, New York

An entire generation will be set even further behind

“Student debtors feel forced to downsize their life plans. They delay or forgo marriage and family formation, homeownership, retirement and their children’s education: a profound failure of social reproduction. … The repayment pause was the best thing that ever happened to help student loans get repaid.” — Laura Beamer and Marshall Steinbaum, The New York Times

Asking people to live within their means is good for the long-term health of the economy

“The student-loan-debt pause led borrowers to take on even more debt. Restoring a regular debt-repayment schedule will provide younger voters with a clearer picture of their financial obligations.” — Noah Rothman, National Review

Ending the student loan pause could spark a recession

“My suspicion is that most of the folks who are going to have to start paying again have limited capacity to handle the increased expense. … I expect that this is going to be the tipping point that puts the economy into a recession.” — Thomas Simmons, U.S. economist at Jefferies, to Reuters

Biden’s repayment schemes will soften the blow

“It's hard for experts to predict exactly how many borrowers are going to take advantage of the leniency programs as they start making payments again, but any economic harm will certainly be less than flipping payments back on for all borrowers at the same time with no such flexibility for those who may struggle to afford their loan bills.” — Adam Hardy, Money

Credit: Photo Illustration: Natalie Nelson for Yahoo News; photos: Getty Images (4).