Monday, September 4, 2023

Student Loan Payments Surge Ahead of October Restart, Signaling Economic Uncertainty

Student Loan Payments Surge Ahead of October Restart, Signaling Economic Uncertainty

According to economists at Goldman Sachs, student loan payments in the weeks leading up to the October restart of payments after a pause during COVID have surpassed pre-pandemic levels.


They say that federal education department payments are nearly $150 billion annually or almost double the pre-pandemic level based on weekly payments.


How people manage their student loans, totaling $1.7 trillion for over 40 million Americans, could be an indicator of the direction the economy may take. Initially, optional payments were seen as a positive sign financially for borrowers, indicating that some may be paying ahead of necessity, which is a good sign because it means they aren't struggling to make payments. But now that the payment amount is doubling compared to pre-COVID, it's harder to see.


Alec Phillips, an economist at Goldman Sachs, said that payments "were weaker in recent weeks." People believed that perhaps this is a more encouraging indicator for lenders and borrowers, perhaps it implies that some people are paying early, which is good because it means they're not having trouble paying. But now that it's doubling, it's hard to see."


A large-scale student loan forgiveness plan inches forward.


Why have student loan payments increased?

Phillips said that the possibility of increased payments is because a small portion of borrowers was paying down principal on their loans before interest resumes on September 1st.


Even though all debtors have started their monthly payments early, he claimed that widespread deferment of payments is less common because recent levels are probably higher than anticipated.survey results also shows that some borrowers can't afford to pay on time, never mind two months ago."


Surveys consistently show that most Americans were already financially strained before the two-year freeze on high inflation. At the end of July, surveys conducted by Credit Karma of 2,059 borrowers found that 53% were already struggling to pay other bills before their student loan payments resumed, and 45% expected to be late with their student loan payments after forbearance ended.


What happens when borrowers' first payments come due in October?

Phillips said that Americans may feel more burdened by the prospect of yet another monthly bill than the small positive effects of another month of higher inflation, but "at least for now, I think the chances of serious adverse consequences are relatively low."


He said that helping borrowers make student loan payments should be helped by the Biden administration's so-called "off-ramp" plan.


During the 12-month grace period, borrowers will not be reported to credit agencies or considered delinquent if they miss payments. However, interest will still accrue on their remaining balance.


Mark your calendars: Student loan payments will resume as soon as the pause ends - important dates to remember.


However, the economy will slow as people have less money to spend, Phillips said. He estimates that student loan payments should slow economic growth to 1.3% in the last three months of the year, down from 2.8% in the first three months."


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