BONUS EPISODE: Student Loan Supreme Court Fallout

Published Jul 9, 2023, 9:00 AM

After the Supreme Court threw out President Biden's plan to cut student loan debt, more than 40 million people are preparing to resume payments on their debt. And it's not just former students who could feel the pain. The broader economy could also take a hit. Bloomberg's Denise Pellegrini has details in this special report. 

It was one week ago to the Supreme Court throughout President Biden's plan to cut student loan debt for more than forty million Americans. Now those people are facing the prospect of higher monthly payments when they resume paying off that debt in October. That comes after a three year pause on payments due to the pandemic. It's not just former students who could feel the pain. The broader economy could take a hit as well. Student loans account for nearly ten percent of all outstanding consumer credit, and the prospect of payments resuming could also curb consumer spending. Here with more is Denise Pellegrini in a Bloomberg Radio special report.

It's hard for me to wrap my head around repayment becoming a thing, just because it's been pushed off so many times up until this point.

Megan is twenty five. She's been working at charter schools in Boston and elsewhere after graduating from a top private liberal arts college in Connecticut, and she says she's in shock that she'll have to start repaying all of the tens of thousands of dollars.

I can see myself my lifestyle changing a lot, unfortunately.

And Megan is one of millions of students, former students, and others reeling after the Supreme Court. Throughout the Biden Administration's plan to forgive between ten and twenty thousand dollars of student debt for many.

For the typical student loan borrower, they're going to start paying about three four dollars a month.

Mark Sandy, chief economist at Moody's Analytics, says the one two punch of not having some of the debt forgiven and having to resume the monthly payments as soon as October is going to be painful for.

Many student loan borrowers, younger borrowers, lower income borrowers.

That's tough tough for borrowers like twenty seven year old Marcus, a middle school history teacher and first generation college grad in the Philadelphia metro who owes about fifty thousand dollars in student loans and says all of this has him feeling aasis.

I'm feeling pretty. I'm not going to lie does things. It does hurt. The fact is, you know we're not going to be given this assistance.

Marcus is already cutting and spending to get ready for the hundreds of dollars a month he now expects to start paying back.

I'm cutting coffee every day, like I'm basically building as the end of the week luxury or gift. It's like, you know, if I want to snack this or that, I'm like I need this, I needed that, And also just like limiting how many times I go out socially as well.

And economist Sandy says, on top of cuts in discretionary spending like the ones Marcus is talking about, borrowers are going to start cutting back on basic necessities, especially in the face of the higher cost of living that people are already struggling with.

People have to juggle, meaning you know, they'll be paying late on this and then paying that and then so it's going to be very uncomfortable for a lot of these folks that have been able to not pay on their student lunk the past several years.

And Sandy also says ones payment requirements ramp up, and if borrowers do make their payments, this will take fifty to sixty billion dollars a year out of spending.

Probably about a quarter point zero point three percent. There's points of GDP.

Some other economists are even more worried than Zandy, including Thomas Simon's US economist at.

Jeffries almost like a tax increase.

And Simons calls this impact very significant.

Four hundred dollars times forty five million people is almost eighteen billion dollars a month in the aggregate, and that is roughly a little bit less than one percent of nominal monthly personal income.

Megan says she is planning on cutting back on buying locally sourced food from upscale retailers, and also cutting back on travel and on other big ticket items key to the US economy as well.

My car is so old, so I just think, like when it dies, it dies, and I won't.

Buy a car.

I won't have to worry about gas or anything.

And Simons says the cutbacks like the ones Megan is talking about, come at a bad time for the US economy, as people start to run out of savings they've been using to keep up consumer spending.

I think that, you know, we're pretty close to the end of how much longer that can continue without more sort of rebudgeting going on and people shifting or spending works essential. And as that happens, you know, there are knock on effects that eventually lead to higher unemployment and unfortunately intercession as well.

Some borrowers have already shifted their spending two essentials and are still struggling even without making payments, including Mariah, a twenty nine year old in the Phoenix metro with an undergraduate degree as an athletic trainer, who says as a first generation college student, she thought her degree was the end of her problems, but it turned out to be just the beginning.

I feel like I will never break even.

Mariah says she was skipping some student loan repayments even before the pandemic moratorium began, after salaries in her field failed to rise as much as projected and the cost of certifications intensified. And now after a car accident and a layoff, she does some things she'll be able to start making payments again anytime soon.

Hit the math and I realized for the every two thousand dollars I put in, I get about four thousand worth of interest.

And she describes herself as worse off than some of her friends who didn't go to college.

I do have that didn't go to college, and I honestly I thought the joke was on them and it's like the joke's on me.

One thing that could help is the pay and the Biden administration is now offering a plan that would let borrowers ease back into student loan payments over time. Zandy says, reality we'll sink in for those who owe.

It's not a gift.

It wasn't a gift in the first place. It was alone. I think students know that to understand that.

And Sandy says borrowers who didn't get their degrees may struggle the most. And of course for the borrowers who did keep making payments during the pandemic, they were able to pay down principle, and that's a good thing for their own balance sheets and for the economy, but especially for those who have not paid down their debt. Simon says that now you see it, now you don't shock of not getting flat out. Loan forgiveness is going to have an extra impact on spending plans.

Certainly, consumer and psychology is going to play into it a lot, and.

He says this will make millennial borrowers more cautious about spending long term on things like buying a home.

Do you think of this as like coming into the recession and then leading out to it in maybe like two or three years. That's where we'll start to see these psychological impacts I think really play out.

As for the students we spoke to, Megan will be in graduate school this fall and avoid payments in the short term. Mariah is helping to boost her income to cope, but even so she's not sure she can make the payments. And Marcus plans to use every bonus he gets to pay down principle, meaning he says he expects to have to delay making big purchases like buying a home for years.

It puts a big wrench in the plans that I had.

A wrench in the plans. Marcus had a possible wrench in plans millions of others had for their money. And as the Federal Reserve eyes more possible interest rate hikes, a potential wrench in plans for those hoping for a soft landing for the US economy. Denise Pellegrini, Bloomberg Radio

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