Consumer Spending Expected to Tighten as College Loan Repayment Restarts

Following a three-year hiatus during the pandemic, roughly 27 million borrowers will restart making student loan payments in October. The timing couldn’t be worse for the retail market as the holiday season approaches; as well as consumers that are facing shrinking savings, a cooler job market, and higher price levels after two years of rapid inflation. It has yet to be determined what impact it could have on retail sales and discretionary spending as people need to budget once again for student loan payments. If a large share of consumers cut back simultaneously, the hit to the overall economy could be substantial, but not so big that it would push the U.S. into a recession according to what most economists think. In an effort to ease some of the added financial burden, the Biden administration is “allowing for people with lower incomes to repay their loans more slowly and creating a one-year grace period in which missed payments will not be reported to credit rating agencies,” as well as enrolling in a new income-based repayment program that would “decrease monthly payments for people earning low and moderate incomes.” Although estimates of the added cost to households are very rough, with some analysts thinking they are overstated, uncertainties of the potential impact remain — particularly if a significant scaling back of consumer spending coincides with major strikes if they last and a government shutdown if Congress fails to reach a funding agreement by the end of September.