Student Loan Repayments and the Overall United States Economic Outlook

Just when it appears that the unprecedented series of rate hikes by the Federal Reserve is paying off in their fight to quell inflation in the United States, an unanticipated domino effect from the recent SCOTUS ruling against President Biden’s student loan forgiveness attempt may aid them in their efforts. Why? As I have written about numerous times this year, consumer spending may be negatively impacted and could slow down materially by nearly 40 million Americans that will have to start making payments on their student loans that were deferred since 2020 due to COVID-19 legislation

An interest article authored by Joe Pinsker that was published in the Wall Street Journal on July 15, 2023, interviewed several of the borrowers who will be impacted by this change and most felt that they would need to make immediate reductions in their spending habits elsewhere to afford the reinstatement of payments in the near future.

The consensus opinion was that these repayments could cause about a 5% pay cut and that many of them were not prepared to start making these payments again. As I have discussed in prior articles, the pause (deferral, not forgiveness) in making student loan payments put cash in millions of borrower’s wallets or purses and instead of saving it most interviewed agreed that they spent it instead.

As a result, while some are prepared to start making payments again without making any drastic changes in their spending habits, many aren’t, and they have had no choice but to start to curtail their disposable spending immediately. The impact of this pullback on the overall level of consumer spending to the overall United States economy remains to be seen; but recall that 70+/- of the total GDP of the American economy is derived from consumer spending.

As I have documented in the past, the sheer size of the total debt owed by student loan borrowers in the United States is significant. As of today (July 17, 2023) according to the Federal Reserve Bank, the total amount of student loan debt in the United States exceeds $1.8 trillion. Please see the table below reproduced from the website, www.usdebtclock.org for more detailed data and information on this mountain of debt. As an aside, our Federal deficit has now risen to over $32.5 trillion and growing nearly exponentially at the present time.?

Source: www.usdebtclock.org

A recent published research report by Wells Fargo estimated that the average monthly payments that will need to be repaid in the next month or so averages between $210 and $314,?which works out to about 5% of median household income (before taxes) in the United States today. So, the nearly $200 billion in “savings” that 40 million student loan borrowers saved by deferment will need to quickly be found in their monthly budgets if they intend to honor their student loan obligations.

Whether this happens or not remains to be seen, and there have already been alternate (materially reduced) programs announced by the Biden administration to provide $39 billion in student loan relief in the near future. It seems a given that this will be challenged if possible in court so the probability to it happening soon is still in doubt.

Regardless, the return of student loan payments could impact the United States economy and dampen consumer spending helping the Fed “cool the jets” of the American economy in Q4 2023 and beyond. It will be interesting to see what the end results is of this change and if defaults on student loans in the United States soar to record levels as has been predicted by some. Any significant slowdown on Main Street USA can’t be seen as good news for the factoring industry domestically that actually feel in volume YOY 2023 when compared to 2022 volumes.

This also comes at a time when SME sentient about their future economic prospects for the near future have never been more negative and an additional projected 5% cutback by 40 million American consumers who owe student loans could only further depress their outlook and need for working capital to grow. A recent NFIB Research report (June 2023) documented that SME owners simply don’t believe that better business conditions are on the horizon; the most recent NFIB Survey revealed that a net negative 40% metric existed by SME owners today about the future prospects of the American economy.

All added up, this is not a recipe for favorable economic weather in Q3 and Q4 2023 for the factoring industry and now is the time to be vigilant and prepare for the “unexpected” or suffer the economic consequences.?