Student Loan Payments Resumption Won't Shake US Economy, New Fed Research Finds

The Federal Reserve Bank of New York has concluded that the resumption of federal student loan payments will have a minimal effect on the U.S. economy.

What Happened: The New York Federal Reserve has indicated that the return of federal student loan payments will not significantly impact the U.S. economy, as reported by The Wall Street Journal. The research suggests an estimated average monthly spending cut of $56 by millions of student borrowers resuming loan payments.

This translates to a reduction of approximately $1.6 billion in consumer spending every month across 28 million federal student loan borrowers.

“The findings suggest that the payment resumption will have a relatively small overall effect on consumption, on the order of a 0.1-percentage-point reduction in aggregate spending from August levels," said the New York Fed research team in a post on the bank's Liberty Street Economics blog.

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The federal student loan payments were put on hold during the Covid-19 pandemic in 2020. The 43-month pause in payments resulted in savings of over $260 billion in waived payments throughout the pandemic for borrowers. Federal student loan interest resumed in September, with payments starting again this month.

The researchers suggested that new regulations on federal income-driven repayment plans and accrued savings will help alleviate some of the burden in monthly payments.

Why It Matters: The resumption of federal student loan payments after a three-year pandemic-induced pause could result in new spending patterns and financial stress for nearly 44 million Americans. According to a survey by Jefferies, sectors such as apparel, accessories, restaurants, and footwear could face headwinds.

President Joe Biden in July announced the forgiveness of $130 million in student debt for 7,400 borrowers who attended the now-defunct CollegeAmerica. This debt relief measure followed allegations of the college misleading students about their career prospects and loans.

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