Interest payments on federal student debt will return in 2023 after almost a 3-year gap. This is likely to create a drag on U.S. consumer spending at a time when the U.S. economy could already be softening. This impact could be substantial enough to eliminate growth in consumer spending on goods and services for January 2023.
Interest Forbearance Under The CARES Act
Since March of 2020, interest payments haven’t been due on federal student loans due to the pandemic response. In January 2023, interest payments on federal student debt will resume. Much has been made of the plans for student loan relief, but how will the resumption of student loan interest payments impact the U.S. consumer?
How Big Is The Impact?
Based on personal income data, interest payments by consumers fell by around $50 billion from February to April 2020. This is the time period over which the freeze on federal student loan payments was implemented.
Of course, not all of that change was due to student loans, but much of it was due to the CARES Act which froze repayments on federal student loans in mid-March 2020. The government estimates that the impact of that was $37.8 billion in monthly interest cost.
A Drag On Expenditure
$37.8 billion is of course, a lot of money, but will that matter in the context of the broader economy? It may. Total expenditure on goods and services was $17.6 trillion in September 2022.
The need to pay interest on student loans again works out to around 0.2% of that. It’s potentially enough to be a slight drag on the consumer in Q1 2023. For context, consumer spending, in real terms, has been growing at around 0.1% to 0.3% month-on-month for much of 2022. The resumption of student loan payments may well be large enough to materially slow, or even wipe out, consumer spending growth for January 2023, and be a slight drag for Q1 2023.
However, it remains to be seen how household budgets will be managed as interest costs rise, it seems likely the hit will come to spending, or perhaps consumers, will chose to save less.
Of course, because of student loan forgiveness, interest payments won’t necessarily return to the level of February 2020, but there is still a material amount of student debt out there even after forgiveness.
It does appear that resuming federal student loan interest payments will impact the consumer early in 2023. That may come at an unwelcome time, given other risks to the U.S. economy including a softening housing market and the Federal Reserve continuing to raise interest rates.