The Impact of Student Loan Repayments on the Economy

Experts at JPMorgan have found that the resumption of student loan repayments has had a less negative effect on the economy than initially predicted. Led by Michael Feroli, the JPMorgan team observed that interest and principal payments, which started in October, did not result in as high an increase in student-loan repayments as anticipated.

Initially, there was a significant surge in payments when the end of forbearance was announced over the summer. However, the flow of payments has since cooled off, and recent figures are more indicative of the underlying trend that may settle. The team estimates an annual rate of about $75 billion, which amounts to approximately 0.2% to 0.3% of GDP. In comparison, payments were running at about $10 billion during the moratorium. While a one-for-one pullback in consumer spending could potentially hurt real GDP growth by around 1%, the team expects a less significant drag on economic activity. This is due to favorable household balance sheets, which make it relatively easy for households to make these payments. Additionally, early payments from many individuals reinforce this notion.

To support their findings, the team referred to the New York Fed's monthly survey of consumer expectations. This survey revealed that borrowers with delayed repayments anticipated cutting consumption by an average of about $56 per month. When scaled up to the 28 million borrowers, this would result in a decrease of approximately 0.1% in consumer spending for August, or a drop of 0.3% in annualized GDP. However, it should be noted that the sample size for this survey was small, with only 151 respondents.

Despite the gradual return of student loan repayments, estimates from the Atlanta Fed place third-quarter GDP growth at 5.4%, while economists polled by the Wall Street Journal forecast 4.5% growth. These figures include the period in which student-loan repayments began to pour in, even though they were not yet required.