October 18, 2023
There have been numerous stories in the media about how the resumption this month of student loan repayments, after a three-and-a-half-year pandemic pause, will be a serious blow to the economy and tens of millions of borrowers. In fact, there was little basis for this concern, as a new analysis from the New York Federal Reserve Bank makes clear.
The study found that the vast majority of people facing repayment for the first time (people who finished school since the pandemic) would enter the new income-driven repayment plan developed by the Biden administration. More than half of the people who were already repaying their loans, are already in an income-based repayment plan, which is now considerably more generous.
As a practical matter, the idea that low-income borrowers would be devastated by loan payments is nonsense on its face. Under this plan, borrowers will pay nothing if their income is less than 225 percent of the poverty level for their family size. This means that a single person would pay zero if their income is less than $32,800. A person with one kid would pay zero if their income was less than $44,370.
Furthermore, they only pay 5 percent of their income on amounts above these cutoffs. This means that a single person with an income of $40,000 a year would face repayments of $360 a year or $30 a month. A person with one child and an income of $50,000 a year would have to pay $282 a year, or $23.50 a month.
If we up these figures to $50,000 for a single person or $60,000 for a person with one child, the annual payments would rise to $860 a year ($71.70 a month) and $782 a year ($65.20 a month). These figures may not be altogether trivial for moderate income households, but they also not likely to be devastating for most families.
It is also worth noting that under the Biden administration plan, the outstanding loan balance cannot increase even if borrowers are not covering their interest payment. In many cases, any unpaid balance will be forgiven after ten years in the plan. In the most of the rest it will be forgiven after 20 years.
The New York Fed survey asked borrowers how they expected the repayment requirement to affect their spending. On average, they expected that it would reduce their spending by $56 a month. With 28 million federal loan borrowers newly facing a repayment requirement, this comes to a reduction in monthly spending of $1.6 billion. That is a bit more than 0.1 percent of monthly consumption spending.
That sort of reduction in consumption spending will barely be noticeable in GDP measures. This limited impact was entirely predictable, it was unfortunate that many news outlets highlighted the prospect of resumed payments as a serious threat to the economy.
It is also unfortunate that more attention was not given to the Biden administration’s more generous income-driven loan repayment plan. Many borrowers have likely been worrying unnecessarily because they did not realize that they would pay little or nothing under the terms of the plan. It would be useful if the media did more to highlight the details of the Biden plan so that more borrowers are aware of the options available to them.
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