Notices alerting borrowers that student loan repayments will resume on October 1 are hitting mailboxes and emails. For some, it has been a freak-out moment as they consider how they will adjust their budgets to start paying on their debt loads.

The big question is what the impact on our national economy will be when millions of borrowers suddenly have $200-$300 less in their budget each month to spend on themselves and their households.

Whether major or minor, the impact will be widespread.

What’s happening

After a three-year pause due to the pandemic (and a failed attempt to wipe out tens of thousands of student loan debt by President Biden), student loan debt holders must begin to repay their loans next month.

Some 43 million borrowers owe over $1.75 trillion in student loans and an average of $28,950 is owed per borrower. Nearly all (92%) of student debt is federal student loans; just 8% of debt is private student loans.

According to Federal Reserve data, women were more likely than men to have student debt (47% versus 40%) and women had higher student debt levels than men ($9,400 versus $7,700).

Among racial demographics, black adults were more likely to have student loan debt than white adults and Hispanic adults (50%, 44%, and 37%, respectively) and were more likely to carry higher balances than their counterparts. 

What this means

As millions of borrowers begin repaying their student loan debt they are going to have to figure out how to afford those payments. 

More than half of borrowers polled by said they are not prepared for payments. More than a third of borrowers spent money they otherwise would not have because they believed that the Biden administration would forgive some of that debt. 

Borrowers face a significantly different economic environment now compared to when last they paid Sallie Mae. Inflation is the biggest difference between now and early 2020 when payments were stopped. Price increases began to accelerate in 2021 and hit a 40-year-high in 2022. They remain elevated by as much as 16% higher than in 2021. 

Households, particularly those with low incomes or on fixed budgets, have struggled to pay increasingly more of their incomes on basic needs such as food, shelter, gas, and utilities. Middle-class families have also grown more strapped after two years of protracted high prices on nearly every category of goods and services.

Consumers have altered their shopping habits in light of inflation: cutting back on the number of items they purchase, trading down to cheaper brands, digging into savings, racking up credit card debt, and even tapping into their retirement funds. 

Consumer spending kept the national economy buoyant and growing modestly, but now some analysts and industry experts worry that spending may start to slow. The research team at Goldman Sachs estimates that student loan payments will decrease fourth-quarter economic growth by 0.5 percentage points. Retail analysts also fear that a slowdown could lead to missing out on over $100 billion worth of sales over the next year.

Here are 4 ways borrowers will raise the cash to repay their loans: 

  1. Earning extra income – Look for workers to ramp up hours, take on gig work or second jobs, or start side businesses to supplement their income. In the restaurant industry, existing workers are taking on more shifts and new workers are available, developments attributed to the looming return of student loan repayments.
  2. Cutting back on expenses –  Retailers already note a pullback in spending and anticipate that will continue into the final quarter of 2023, which is the most pivotal for an industry that makes a third or more of annual revenue during the last few months of the year. “[Y]ounger Americans — those more likely to be impacted by student loans — are more likely to buy less apparel, beauty and skin care products and alcohol,” said Jack Mackinnon, senior director of cultural insights at consumer research firm Collage Group, told Modern Retail.
  3. Tapping savings – Given inflation, one out of four (27%) of Americans said they withdrew money from savings, and over half (54%) of those adults said they used that money to pay for everyday expenses. Savings built up during the pandemic closures have been a cushion against inflation, but those with savings may be forced to dig deeper into their reserves to repay their loans.
  4. Forgoing savings – Many Americans may stop saving or cut down on squirreling away money for retirement. Currently, 28% of Americans report doing so. Look for this to increase.

Bottom Line

Inflation has eroded consumers’ buying power and forced them to spend more just to buy the same or less. The student loan payment moratorium was a brief reprieve that gave some the chance to spend on other things. Now that the break is over, borrowers will have to find room in their budgets.

Policies that allow workers to earn multiple incomes and to keep more of their incomes are critical now more than ever. Keeping taxes low, not reclassifying workers who want to be independent contractors, and deregulation are a start.