Household Formation Could Suffer as Student Loan Payments Resume

Yet another study has been published predicting adverse consequences for the economy as a result of the Supreme Court’s decision to strike down President Joe Biden’s student loan forgiveness plan.

As a result of the ruling, interest on loans to student borrowers will begin accruing in September. Monthly payments on the loans will resume in October. 

It follows an automatic pause on eligible loan payments by the Federal Student Loan administration during Covid. The agency also set interest rates to 0% starting March 13, 2020. With loan payments now restored, the shock will be especially severe for Gen Z adults who graduated during this period, many of whom have never made a student loan payment, as noted in a new analysis by Marcus & Millichap.

“Given that over 43 million people hold some federal student loan debt, amounting to more than $1.6 trillion, this could negatively affect consumer activity,” Marcus & Millichap stated. 

Retail could suffer a heavy blow as borrowers cut back on spending to make loan payments, especially over the holiday season. “A tempered holiday season could impair the most troubled tenants,” the analysis noted. It cites a study by Deutsche Bank that estimates consumer spending will fall by $14 billion a month. However, necessity vendors like grocers or discount stores may be spared the worst.

Leisure travel is also expected to be affected, especially since over half of millennials and Gen Z adults are frequent travelers. “Nearly 15 million of 25-34 year-olds – or 33% — have student debt, amounting to over $500 billion owed,” Marcus & Millichap reported. “The resumption of payments presents a possible shift in demand by market segmentation.” This could benefit bookings at economy hotels at the expense of full or select-service hotels, or lead to a cutback in international travel in favor of domestic vacations.

More significant is that the end of the loan pause is also expected to delay household formation and homeownership, as borrowers may have difficulty saving for a down payment or qualifying for a loan – especially with low available housing stock and rising interest rates. The effect is likely to keep people as renters longer. “While this could stabilize apartment vacancy after recent increases, the prevalence of household consolidation could also pick up,” the analysis noted. “Tighter budgets may lead some borrowers to seek out roommates and split rent.”

Apartment dwellers will likely trade down as well, according to Moody’s which noted “already extremely tight Class B/C rental markets where inventory growth was lagging.”

Moodys concluded the effect of lower disposable income caused by student loan repayments could be to force households to trade down from Class A to ClassB/C rental units, which are already in short supply, or share with others to avoid homelessness.

The only good news for student borrowers is that the Department of Education has taken action to try to give borrowers a little breathing room, Marcus & Millichap noted.  DOE is instituting a 12-month “on-ramp” from October 1, 2023 to September 30, 2024. During this period, financially vulnerable borrowers who miss monthly payments will not be considered delinquent, or reported to credit bureaus, placed in default, or referred to debt collection agencies.

The administration has also finalized what it is calling “the most affordable repayment plan ever created.” The Saving on a Valuable Education (SAVE) plan is an income-driven repayment plan. “It will cut monthly payments to zero dollars for millions of low-income borrowers, save all other borrowers at least $1,000 per year, and stop runaway interest that leaves borrowers owing more than their initial loan,” according to DOE. It will do this by cutting from 10% to 5% a month the amount undergraduate borrowers must pay, raise the amount that is considered non-discretionary income and protected from repayment, and forgive loan balances after 10 years, instead of 20, for borrowers with original loan balances of $12,000 or less.

DOE will hold a public hearing on rulemaking topics to consider on July 18.