How restarting student loan payments could impact the U.S. economy

Under the debt deal that is moving its way through Congress, borrowers would have to resume making payments on their student loans. Thomas Simmons, U.S. Economist at Jefferies, explains how restarting those payments could impact the U.S. economy.

Video Transcript

- By the end of the summer. Here to break it all down, the economic implications of this, we want to bring in Thomas Simons, Jefferies US economist. Thomas, it's good to see you here. I know that you've been digging into exactly what this will mean for Americans. When it comes to the economy, what could this potentially do to consumer spending?

THOMAS SIMONS: Yeah. I think that it's a really interesting topic because it's something that's very, very difficult to quantify. When we stopped the student loan payments back in 2020, it came alongside all these other stimulus packages that were going through at the same time. Direct stimulus checks, bigger unemployment benefits, rent moratorium, all sorts of different things. So it was really hard to isolate exactly how much of a stimulus we got just from stopping those payments, which we have seen a number of different estimates on how much student loan borrowers pay per month. But it looks like it's somewhere around $400 a month on average.

So now that we've seen all these other stimulus programs and packages expire and sort of rebound, we've gotten the payback on that. We haven't seen it yet with student loans. Like you said, we're very likely to see that as soon as we get into August and September at this point. And it looks very similar to what we saw in 2013 with the fiscal cliff.

Back then, there were some temporary tax breaks that were all kind of expiring at the same time. And if they all expired at the same time without any sort of offsets, it would have been a very significant fiscal drag. The deal that came together essentially amounted to a 1% increase in payroll taxes for people who receive a paycheck from their employer. That ended up generating a drag of about 1%, a little bit more on discretionary spending, to overall PCE. So when you look at economic growth in the first half of 2013, there's a very noticeable dip in PCE, and thus dip in GDP as well.

- And speaking of that, Thomas, Diane here, what are you expecting as for the broader impact to the economy? So, obviously, this could clearly have an impact on consumer spending. But what's the overarching ripple effect that you expect to see from these student loan payments coming back into people's household budgets?

THOMAS SIMONS: Yeah. I mean, there's obviously the direct sort of headline impact in terms of having less to spend elsewhere. But the other issue is not just spending on goods and services, but also servicing debt as well too, right. We saw delinquency rates on credit card loans and mortgages, auto loans, any sort of consumer loan fall to very, very low levels during the immediate aftermath of the pandemic. And that's as student loan delinquencies essentially fell to zero. It's hard to be delinquent on a payment that isn't necessarily required of you at that point.

So as we're now adding this back in to balance sheets that are already pretty strained by two years of very high inflation that's run significantly higher than wage growth, the capacity to absorb this in a lot of budgets I think is much worse now than even-- again, talking about our 2013 example, economic growth was relatively slow back then. But interest rates were really low. Inflation was really low. The labor market was still in the process of recovering.

There were a number of offsets, I think, that you could say, all right, well, the households will be able to absorb this eventually in that we won't see growth impaired for a long, long time. But here, I'm much more concerned because consumers have taken down all of their-- essentially, all of their excess savings from the period of time during the pandemic when they couldn't be spending money during the lockdowns and that sort of thing. As they've, again, had to use those savings to offset the impact of inflation, I think now it's just the worst possible time for many of those households to be hit with this extra bill.

- Yeah. Certainly is a very terrible time. Millions of Americans can't afford it right now. Thomas, what does this mean just in terms of the odds of a recession? We know the consumer has been one of the bright spots of the economy, has been extremely resilient, like you have been saying, really throughout the pandemic. Does this then increase the odds that we'll see a recession?

THOMAS SIMONS: I think it does. I've been expecting that we're going to get a recession towards the second half of this year for a long time now. And the student loan issue just kind of compounds issues that I think are already sort of set in place in not only in the consumer spending mix, but also in the labor market, which is eventually, of course, going to lead to further issues with consumer spending down the road.

I think that businesses have done really well in passing along increased costs to consumers so far. It has really been remarkable. I had expected that there would be much more margin compression this year. And instead, they've actually done a pretty good job of recapturing a lot of that margin. I don't think that that happens on an ongoing basis into infinity because, again, I think that a lot of those cost increases have been absorbed by that dis-savings that has a finite amount. And there's just really isn't that much more to go.

So if we do see the next phase of margin recapturing and growth for top line-- or, actually, bottom line for corporations, I think layoffs are really the next piece of the puzzle because it's basically the only way that they're going to be able to find cost savings significant enough to continue to deliver for investors. As that happens and we see wage growth slow, it's going to really impact consumer spending as well. Sorry.

- So Thomas, I got to ask, though, the job market has shown itself to be surprisingly resilient. We had the last jobs report was better than expected once again. We have another one coming this Friday. We had JOLTS out today that was more than 10 million. That was more than expected. So are we really expecting the jobs report showing anything but more gains? When are you expecting those layoffs to show up in the monthly numbers?

THOMAS SIMONS: Yeah. So, I mean, I can't sit here and tell you that I think we're going to get a poorer number on Friday. I actually think we're going to get something around 230k for payrolls and basically an unchanged unemployment rate. But these are all more or less, I think, lagged indicators telling us sort of where the labor market already was for the last few months. The primary job growth engine so far during this expansion has been in small businesses.

And you referenced the JOLTS data. We saw this huge increase in businesses with only one to nine employees producing many of the job openings, and thus many of the jobs. Now, those are brand new businesses that have just been started. We've seen an explosion of those businesses being started throughout the last three years. I really suspect that given that their primary source of credit is through bank lending that there's not going to be this further and further legs of that same development of small businesses.

I don't think that this is something where you can say, oh, well, we had all these issues in the regional bank system that have now kind of impaired this flow of credit and we're going to get all these negative consequences. These were already sort of things were set in motion by all of the cumulative rate increases that we've had so far through this cycle as well. Credit tightening has happened on the lending side. And also, demand has fallen off sharply as well. And I think that as we see that demand translate to fewer small business creations, it's going to lead to less hiring, and thus as we see less sort of gross hiring in the labor market, we'll start to see weaker businesses fall off and have to cut headcount, unfortunately.

- All right. Thomas Simons, something we, of course, will continue to closely watch. Thanks so much for joining us here. Jefferies US economist.