Student Loans: Why Repayment Pain Will Hit Politics More Than the Economy – Barron’s

Given the sums involved, some economists posit that resumption of student-loan payments will exert a drag on the economy. Some 43 million borrowers with $1.7 trillion in student debt will have to begin repaying soon.

Based on the average debt per borrower and the average interest rates on those loans, those monthly payments are expected to be about $380, according to a research note from Glenmede Trust Co. That would be equal to about 10% of the average U.S. household income.

To avoid that hit, the White House unveiled Plan B after the high court knocked down its original scheme. It would limit repayment by undergraduate borrowers to 5% of an income threshold equal to 225% of the poverty line, or about $33,000. If borrowers don’t pay off their principal after a specified time period (10 or 20 years, depending on the amount borrowed), the balance would be canceled.

The details may be moot since this alternative plan also may also get shot down. A new legal challenge seems inevitable, writes Stephen Pavlick, Washington policy analyst at Renaissance Macro Research. Given the 6-3 decision to reject the first debt relief plan, he adds, it’s hard to see this court not reaching a similar ruling on Plan B.

Canceling the student-loan forgiveness plan will have a small, positive effect on the federal deficit. In September, the Congressional Budget Office estimated the cost of Biden’s original program at $400 billion, Pavlick notes. The Penn Wharton Budget model put the tab at $469 billion to $519 billion. While that’s overshadowed by trillion-dollar annual deficits as far as the eye can see, this would still amount to “real money” by the famous definition popularly attributed to Sen. Everett Dirkson.

But what would it mean for consumer spending and the economy? As with so much of modern-day America, the hardship on lower-income borrowers will be substantial. But the bulk of student-loan debt is borne by upper-income borrowers, for whom repayment should present a relatively minor burden. It’s the highest earners who disproportionately drive spending, on which more than two-thirds of the U.S. economy depends.

According to 2019 Federal Reserve data cited by Northern Trust economists, 36% of households in the lowest income quartile earning under $30,000 a year carry some student debt, and they will surely feel the pinch when they resume paying it back. Among those in the second quartile, 22% of households have student loans, close to the percentage of all U.S. households (21%). Among the top decile of income (households earning $236,200), only 6% took out student loans.

But when it comes to the proportion of total student debt owed by each income cohort, the results were the exact opposite. Rich borrowers owed the largest percentage of overall student debt. And the largest percentage of those loans were taken on by those with masters, professional, and doctoral degrees, together constituting over half of the total.

By contrast, the lowest-income households owed the smallest percentage of overall student debt. And the smallest percentage of loans were taken out by those getting an associates or no college degree.

These findings come from a recent report from the Bank of America Institute, citing data from the Fed and the Brookings Institution. Further, the bank’s own massive deposit data show that upper-income households with student loans have an ample cushion of savings and relatively less other debt.

Breaking down aggregate loan amounts, the chart here shows that top-quintile earners owe the most, some 44.4% of total student debt. The bottom quintile owes the least, some 13.8%. The middle of the income distribution, the quintile ranging from 40% to 60%, accounts for a bit more than a quarter (25.3%) of student debt.

BofA found that its higher-income households have been increasing their spending at a relatively slower pace than other income groups, and the resumption of student-loan repayments could deter some discretionary outlays. The bank also found that higher-income households have what it terms “sufficient financial buffers” from higher savings and lower credit-card utilization, so they should be OK.

But the bank also found that higher-income customers with student loans have been boosting savings since the repayment moratorium took effect in April 2020 more than upper-income customers without student debt. The original Biden student-loan forgiveness plan wouldn’t have covered them anyway, so they would have expected to resume payments eventually.

Thus, it appears that borrowers with the biggest student loans—high-income earners with medical, law, and other advanced degrees—should be able and presumably willing to resume paying them back on Oct. 1. The crunch will come for less-well-off borrowers, for whom the average monthly $380 payment will be a burden. For them, the only choice will be belt-tightening or even default.

But for total consumer spending, the impact should be less severe. According to the 2021 Consumer Expenditure Surveys from the Bureau of Labor Statistics, our statistician Dan Lam calculates that the top 10% of earners accounted for over 23% of spending. The second decile made up 15%. So, the top 20% of households accounted for 38.5% of spending.

There are more less-well-off households that might have been hoping for student-loan relief. That was an issue Joe Biden ran for president on. If his Plan B also gets struck down, he could suffer political consequences for failing to deliver, which may explain the White House’s announcement on Friday forgiving $33 billion in loans through a Dept. of Education program. But spending by upper-income households, which count the most for the total economy, should be less affected.

Corrections & Amplifications

Based on the average student debt per borrower and the average interest rates on those loans, monthly payments are expected to be about $380, according to a research note from Glenmede Trust Co. An earlier version of this column incorrectly attributed the note to Glenmede Investment Management.

Write to Randall W. Forsyth at randall.forsyth@barrons.com