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Student Loans Are Back In School
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Navigating the Post-COVID Student Loan Landscape
The resumption of student loan payments in the United States, following a pause due to the COVID-19 pandemic, is creating a complex and challenging situation for borrowers.
The student loan payments pause were a relief measure introduced during the pandemic. This measure has reached its expiration and borrowers are now required to restart their payments, which includes the interest accrued on their loans. This situation is particularly challenging for approximately 40% of borrowers whose loans were transferred to a new servicer during the pause. As well, millions of borrowers graduated when the relief measure was implemented and have never had to make a payment until now.
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The resumption of student loan payments is not only a concern for borrowers but also has significant implications for the broader economy. Major retailers and consumer companies are expressing concerns about a potential decrease in consumer spending as borrowers divert funds towards loan repayments. This concern is heightened by high inflation and rising borrowing costs.
Research from Oxford Economics suggests that the resumption of student loan repayments could potentially reduce consumer spending by as much as $9 billion per month which is over $100 billion per year when annualized. This reduction in consumer spending could have a significant impact on businesses and overall economic growth.
In response to these challenges, the Biden administration has introduced measures such as a 12-month on-ramp period and changes to income-driven repayment plans. These measures have been met with criticism and concerns about their effectiveness. Some critics argue that these measures are insufficient without broader debt forgiveness. Borrowers must decide whether to start making payments immediately or take advantage of a 12-month on-ramp period, during which interest accrues and loans are not marked as delinquent.
American Savings & Retailers
The revival of student loan payments raises concerns, coinciding with a gradual erosion of the savings buffer among American consumers since its peak in 2021. Starting in 2022, a monthly average of $100 billion was withdrawn from savings by American consumers. Unless a reversal occurs in this trajectory, excess savings are expected to run out this quarter.
Since then, revolving credit—largely comprising credit card debt—has expanded to $1.26 trillion. In this year's second quarter, credit card debt on its own surpassed $1 trillion for the first time in history. However, indications suggest that Americans are nearing their credit card limits. Notably, revolving debt saw an abrupt reduction in June, hinting at a slowdown in American spending. Fed Consumer Credit Report
The depletion of excess savings and the deceleration in credit card expenditures present concerning developments for the US economy. The decline in credit card spending is particularly significant due to consumer expenditure constituting two-thirds of the entire US economy.
The recent financial reports from major retailers such as Macy's and Kohl's indicate a concerning trend in the retail sector. Both companies experienced significant drops in their stock prices, with comparable sales in Macy's experiencing an 8.2% drop and Kohl's seeing a 5% decline. These figures were notably worse than the 4.1% decline suggested by retail sales data for the same period. Despite exceeding Wall Street expectations, both companies saw their stock prices plummet, with Macy's shares falling 14% and Kohl's dropping by 10%.
Macy's also reported an unexpected increase in delinquencies on its credit card, causing the company to revise its bad debt outlook. Credit card revenues at the company fell 41% from the previous year, well below analyst expectations. Kohl's credit card revenue declined by a milder 3%, but payment rates dropped, although they remain above 2019 levels. Credit card revenues are a crucial component of department stores' bottom lines, representing a significant portion of operating income.
The negative trend extended beyond department stores, as Dicks Sporting Goods and Foot Locker also reported disappointing results. Foot Locker's stock plummeted by 33% after revising its guidance down. Dick's stock fell 24% after missing earnings expectations for the first time in three years and cutting its profit outlook. The company cited inventory losses from theft as a major factor, an indicator of contracting savings. The poor performance of department stores suggests that their strength in recent years was largely built on excess consumer savings.
The impact of student loans on the economy is multifaceted. On one hand, they contribute to economic growth by enabling more individuals to attain higher education and potentially earn higher incomes. This increased earning potential can lead to increased consumer spending, which drives economic growth.
On the other hand, high levels of student loan debt can have negative economic implications. High debt levels can limit borrowers' ability to qualify for other types of credit, including mortgages, which can impact the housing market. Additionally, high student loan debt can lead to decreased consumer spending in other areas as individuals may prioritize loan repayment over other expenses.
Restarting of student loans can lead to increased revenue for lenders and potentially for the government if the loans are federally backed. This increased revenue can then be reinvested in the economy in various ways, such as through new loans or government spending. However, these loans can place a financial burden on borrowers, particularly if they are still facing financial hardship. This could lead to increased default rates, which can have negative implications for both lenders and borrowers. Additionally, if borrowers are forced to prioritize loan repayments over other spending, this could lead to decreased consumer spending in other areas, potentially slowing economic growth.
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