- The US economy is barreling toward a ‘student loan cliff,’ with a moratorium on repayments set to end this year, according to Jefferies.
- Cash-strapped households could scale back spending if the loan repayments resume, hitting economic growth.
- “The additional risk to overall US economic growth is notable,” Tim Simons, an economist at Jefferies, said.
The US economy is barreling toward a “student loan cliff” as borrowers may owe $18 billion in monthly repayments once President Joe Biden’s pause on higher-education loan payments ends later this year, according to Jefferies.
Should such repayments resume, that will likely force households already strapped for cash to rein in their spending – and that will put a strain on the overall economy, the investment bank said. An end to the loan moratorium will affect about 45 million borrowers, according to the firm.
“If the resumption of student loan repayments creates ~2% downward pressure on personal consumption expenditures, the additional risk to overall US economic growth is notable,” Tim Simons, an economist at Jefferies, wrote in a recent research note.
“To the extent that this is probably not budgeted for by consumers, the impact will be funded by reductions in expenditures,” he added.
Student loan-related obligations have been paused since the start of the pandemic, but the moratorium is set to end soon, with payments restarting this August or two months after the US Supreme Court makes a decision on Biden’s forgiveness plan for such liabilities — whichever date comes first.
Jefferies estimated that the average payment on such loans would be $393 per month, for each borrower. That can be tough for many households to factor into their monthly budget, given that they are already struggling with high living costs and staggering credit-card debt.
“Households are faced with higher rates and balance sheets that have been squeezed by 2Y of high inflation. While debt coverage metrics look to be substantially improved since the start of the pandemic, a snapback to prior delinquency levels looks much more ominous,” Simons said.