Recession Threat Looms as Student Loan Repayments Restart: Impact on Consumer Finances

Recession threat delayed, not averted

This all appears to tally with the Federal Reserve’s own soft landing thesis, but we still see a high probability of a recession. Lending growth is slowing with the Fed’s Senior Loan Officer survey suggesting it could turn negative before the end of this year. Business confidence remains in recession territory based on data from the Conference Board and the National Federation for Independent Businesses, and we know that monetary policy operates with lags with the full effects of higher interest rates yet to be felt.

A key reason that the economy has proved to be more resilient than we expected was consumers’ willingness to run down savings they had accumulated during the pandemic. We suspected they may choose to maintain larger savings buffers, while a $150bn surge in credit card borrowing since mid-2021, bringing the outstanding total to nearly $1tn, has additionally financed consumer largesse. But household savings and banks' willingness to lend are a dwindling finite resource and for many millions of Americans, the financial challenges are going to increase significantly over the next few months. That’s because as part of the deal to raise the US debt ceiling, the pandemic support for 43 million student loan borrowers has ended.

From 1 September, interest is once again being charged on $1.6tn of outstanding debt and from 1 October payments restart. With the Supreme Court throwing out President Biden’s plans to forgive up to $20,000 of an individual borrower’s debt this means that from the start of the fourth quarter around 30 million of those 43 million borrowers will have to find an average of $350 per month to cover the loans - current students don't pay while some other borrowers have defaulted or have deferred. That works out at around $130bn in aggregate for a year in interest and repayment, equivalent to around 0.75% of consumer spending.