Mark N. from Atlanta, GA asks: Hello Mitch, I’ve read in some of your other pieces about the strength of the U.S. consumer—and how shopping and spending has been holding up the economy. With student loan payments coming back into the picture, do you think it could be the end of the road for consumers?
Mitch’s Response:
Thanks for writing, Mark. Great question.
For a bit of context, the federal government suspended student loan payments in February 2020, as part of a pandemic fiscal stimulus relief package. The Biden administration tried to forgive about $400 billion in student debt ahead of payments starting back up, but the Supreme Court ruled that student loan debt forgiveness wasn’t in the purview of the executive branch.1
All told, in October of this year, roughly 27 million borrowers will need to start making payments on student debt again. That has many economists and investors worried that discretionary spending will fall off a cliff. If consumers need to spend hundreds of dollars a month paying down debt, that’s money they can’t spend on goods and services in the economy. The timing of the payments could be meaningful too, coming just a month before the holiday shopping season kicks into high gear.
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Mark is right to point out that consumers have been major drivers of economic resilience in 2023. In Q2, for example, the Consumer Discretionary sector produced +35.43% year-over-year earnings growth on +11.63% higher revenues (also the strongest showing among S&P 500 sectors). In August, retail sales rose much faster than expected, climbing 0.6% month-over-month.
Is all of this strong spending going to evaporate with student loan payments weighing on households? By some estimates, student loan payments could cost households about $70 billion per year.
While $70 billion seems like a big number, it is quite small relative to the trillion consumers spend each year. Analysis suggests that student loan payments could subtract about 0.8% from consumer spending growth in Q4, which would only slow it to 1.4%.
It’s also worth noting that the average student loan payment before the moratorium was $265, which is not likely to break the bank for most U.S. households. According to the New York Federal Reserve, the median student loan balance at the end of 2021 was $18,767, and about 60% of households owed less than $25,000. Few will be happy about resuming payments, but most will find it manageable, in my view.
Recall that the jobs market has remained strong, with the unemployment rate sitting at 3.8% in August. Workers are earning more, too. Over the past 12 months, average hourly earnings have increased by 4.3%, while inflation (CPI, including food and energy) has risen by 3.2% over the same period.
This extra income cushion should help borrowers absorb payments without making a severe dent in their discretionary spending – or the economy.
If you’re still concerned about how these market changes will affect your investment portfolio, I recommend taking a look at resources that can potentially guide you through uncertain times.
Our guide, “How Market Timing Can Affect Your Retirement Plan”4, offers potential solutions to common investing mistakes and goes through behavioral traps that investors should stay away from when it comes to financial planning.
If you have $500,000 or more to invest and want to learn how you may be able to avoid these mistakes today, get your free copy by clicking on the link below:
Disclosure
2 ZIM may amend or rescind the “How Market Timing Can Affect Your Retirement Plan” guide for any reason and at ZIM’s discretion.
3 Fred Economic Data. September 1, 2023. https://fred.stlouisfed.org/series/CES0500000003#
4 ZIM may amend or rescind the “How Market Timing Can Affect Your Retirement Plan” guide for any reason and at ZIM’s discretion.
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