America’s impending “payment shock” reverberates across households, highlighting the intricate web of student debt, financial security, and a potential recession. And here’s what’s about to happen: According to the MassMutual Consumer Spending & Saving Index, approximately 75% of borrowers are planning to reduce their expenditures as they prepare to resume student loan payments. This means that their money will be derived to their raising loans debts.
Close to 44 million Americans are anxiously eyeing their calendars as the end of the student debts moratorium approaches. The hiatus, lasting three and a half years, has provided temporary relief, but the looming resumption threatens their daily financial stability. The immediate consequences? Potentially cutting back on retirement contributions, tightening purse strings on essentials, and growing financial concerns.
The Countdown Begins: A Looming Financial Storm
Similarly to the data previously showed, a survey conducted by Corebridge Financial and Morning Consult revealed that the same percentage of individuals anticipate difficulties in saving for retirement once their student loans come back into play.
This marks a concerning shift in savings trends compared to the past three years, potentially leading to adjustments in 401(k) contributions and a decrease in both discretionary and essential spending. Analysts have frequently flagged the “student loan cliff” phenomenon, hinting at possible financial pitfalls. The broader concern? A dip in consumer expenditure once these monthly bills resurface.
Add inflation woes and soaring interest rates, and the average household may find it challenging to accommodate these bills. The United States could see a monthly drop in consumer spending by an estimated $9 billion, with potential repercussions for the GDP in the upcoming years, as Oxford Economics forecasts.
Mounting Debts: More than Just Student Loans
For many, the moratorium wasn’t just about pausing student loan payments. It was a time when other financial responsibilities like car loans, credit card bills, and mortgages emerged. So, the impending ‘payment shock’ isn’t just about repaying student loans. For many, it’s about juggling multiple financial responsibilities which have accumulated over the hiatus period. Liz Pagel, from TransUnion, points out the significant financial strain many will face with these added payments.
However, there’s a silver lining. Oxford Economics suggests that some households, especially from the middle to upper-income brackets, could potentially counterbalance the resumed loan payments using their savings.
Proactive Moves: Borrowers Repaying Ahead of Time
Interestingly, some have already taken proactive measures, repaying a record $3.6 billion in early September. This surge is in stark contrast to the same time last year, when repayments hovered around the $400 million mark. The payment hiatus also allowed many to achieve financial milestones like purchasing homes or repaying other debts. But the looming resumption could potentially offset these gains.
Notably, even the affluent aren’t immune. A Morning Consult survey reveals that 71% of households with an income over $100,000 anticipate missing at least a payment. However, borrowers facing potential defaults have options. Enrolling in income-based repayment plans, like the new SAVE plan, can reduce the financial burden. In dire situations, a 12-month “grace period” announced by the Biden administration can come to their rescue, though some caveats apply.