The upcoming Supreme Court ruling on the constitutionality of President Biden’s student loan forgiveness may be an unprecedented in its near-immediate impact on consumer finance. If the conservative court strikes down the $400-billion giveaway, the US economy could face a close brush with recession.
The stakes for the ruling in Biden v. Nebraska, which could come as early as Friday, is heightened by the fast-approaching end to the moratorium on federal student loan payments that’s been in place since April 2020.
Student Loan Payments To Cut Consumer Spending
Deutsche Bank estimates that a resumption of student loan payments will cut consumer spending by up to $14 billion per month. That amounts to $305 per borrower, analysts Gabriella Carbone and Krisztina Katai wrote on June 21. Interest will begin accumulating on student debt on Sept. 1, with the first payment due in October.
Goldman Sachs estimates that personal consumption spending could face an average hit of six-tenths of a percentage point in the last four months of 2023. However, if the Supreme Court allows Biden’s student loan forgiveness plan to stand, the drag on spending would be cut it half.
The White House has said that its student-loan forgiveness program would fully erase student debt for about 20 million borrowers. About 60% of the 43 million eligible for debt reduction have received Pell Grants, making them eligible to have $20,000 in student debt erased. Other borrowers could have up to $10,000 of their student debt canceled. Eligibility extends to those earning up to $125,000 per year, or $250,000 for couples.
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Supreme Court Student Loan Case
The Supreme Court ruling will hinge on two questions: Did Biden overstep his authority and, if so, do Republican-led states have standing to Sue? Recent rulings by the conservative-dominated court show little patience for government agencies adopting consequential policies without the explicit consent of Congress. That suggests the question of standing is paramount.
The plaintiffs argued that Missouri finances could suffer if state-created student-loan servicer MOHELA lost revenue due to debt cancellation. However, supporting evidence for that claim appears questionable.
Student Loan Payment Holiday Impact
A New York Fed study estimated that student loan borrowers saw $195 billion worth of payments waived in the first two years of the moratorium. That sum has now likely grown to around $300 billion.
The student loan payment holiday not only allowed borrowers to spend more freely but enabled them to take on other debts. Yet now, even before a resumption of student loan payments, Deutsche Bank notes a “sharp rise in credit card delinquency rates,” from 1.5% in the third quarter of 2023 to 2.4% in the most recent quarter. Delinquencies remain well below the peak of around 6% triggered by the 2008 financial crisis.
The student loan holiday is the last major Covid-era government support for household finance. Stimulus checks, inflated jobless benefits and expanded child tax credits are long gone. In the first quarter, emergency SNAP (Supplemental Nutrition Assistance Program) benefits expired. That amounted to a hit of at least $95 per month for eligible households, or about $3 billion per month. Medicaid income limits, suspended at the start of the Covid pandemic, are now returning. That could knock up to 17 million people out of the program over the next year, leaving them to find more costly insurance coverage, a Kaiser Family Foundation analysis finds.
Debt-Ceiling Deal Is Done. Why Recession And Stock-Market Drop May Follow.
Retail Sales Stalls
Even before student loan payments restart, consumer spending is already running out of steam. Retail sales slipped 0.1% in the three months through May vs. the prior three months, on a seasonally adjusted basis.
Spending on services, apart from an uptick on health care, also appears to have slowed down. “The recent flattening in airline passenger numbers and hotel occupancy, and declining dinner numbers at restaurants, suggest that a degree of caution is creeping into consumers’ spending decisions,” wrote Ian Shepherdson of Pantheon Macroeconomics.
Consumer caution, even more than a resumption of student loan payments, is the real US recession risk. Savings a percentage of disposable income bottomed at 2.7% last June, rising to 4.1% in April. But the savings rate is still less than half of its 8%-9% range ahead of the pandemic. A return to pre-pandemic levels could amount to an annual drag on spending of around $800 billion per year.
Wall Street economists have been cutting odds of a recession recently, and the Federal Reserve seems to agree. New projections released in this month show the US economy growing 1% this year, up from a 0.4% forecast in March. The Fed expects similarly slow growth in 2024. Yet the Fed has signaled that it’s not done hiking interest rates as it works to bring down inflation. Policymakers expect the jobless rate to reach 4.1% this year and 4.5% in 2024, which may add to consumer caution.
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