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Below is a complimentary Demography Unplugged research note written by Hedgeye Demography analyst Neil Howe. Click here to learn more and subscribe.

Be sure to check out his highly anticipated new book, The Fourth Turning is Here, which is now available for purchase.

Neil Howe: Will Student Debt Resumption Tank the Economy? - 06.30.2023 student loan cartoon

What’s next now that the Supreme Court has axed student loan relief? While payments are set to resume in October, the Biden administration continues to pursue other debt cancellation options. (The Conversation

After a three-year pause, Americans with student debt are set to resume repaying their loans. Interest will begin accumulating once again in September, and payments will be due starting in October. An estimated 45M Americans hold a total of nearly $1.6T in student loan debt. In 2019, monthly payments averaged $200 to $299, according to the Federal Reserve.

The return of student loan payments comes after the Supreme Court axed President Biden’s plan to forgive up to $20K in debt, which would have provided some relief for the vast majority of borrowers. Nearly half of borrowers, or around 20M people, could have had their student loans erased completely.

With this option now off the table, economists are bracing for consumer spending to take a hit, which could raise the odds of a recession. Moody’s Analytics estimates the resumed payments will reduce annual U.S. consumer spending by -0.4%, while Wells Fargo Economics projects a -0.5% decline. The Federal Reserve estimate of average monthly debt payments multiplied by 45M Americans gives us a ballpark $135B, which is 0.7% of personal consumption expenditures in May 2023 ($18.3T). For an economy that may already be headed toward decline, a -0.7% drop is a serious headwind.

But it remains an open question how long – or even whether – this resumption will actually go into effect. The Biden administration continues to pursue alternate pathways to reduce student debt.

One is a "Plan B" to eliminate indebtedness. This is simply another way of trying to accomplish what the Supreme Court overturned. Biden's initial attempt at loan forgiveness was based on the Heroes Act of 2003, which grants the president the power to revise student loan programs during national emergencies. This time he’s appealing to the Higher Education Act of 1965, but this requires a lengthy rulemaking process that is expected to take at least a year to complete. The comparatively slow process is one of the reasons why Biden opted for the Heroes Act in the first place. Late last week, the White House also announced an additional initiative: the cancellation of $39B in student debt for 800K borrowers as a result of fixing years of administrative errors on payment collectors’ part.

But any version of Plan B is clearly a long-term solution. Since the rulemaking process involves multiple steps, including a comment period and public hearings, it may not even be resolved during Biden's presidency.

His second strategy is not focused on loan forgiveness, but on deferring or eliminating payments. Biden has announced revisions to loan repayment programs that have been in place since the Obama years. The new option, the SAVE Plan, was introduced last year but got little attention before the Supreme Court ruling.

Currently, student borrowers can choose from several income-driven repayment plans. The SAVE Plan will replace the one known as REPAYE, while the other options will be phased out for new borrowers. It will be implemented in two phases. The first phase, which will go into effect later this summer, raises the discretionary income threshold from 125% to 225% of the federal poverty line, which means roughly a million more people will be eligible for $0 monthly payments. It also stops interest from accruing as long as borrowers make regular payments, and it excludes spousal income for married borrowers in calculating their payments.

Next July, the second (and more impactful) phase will go into effect. Payments on undergraduate loans will be capped at 5% of discretionary income instead of 10%, effectively cutting many people’s payments in half. Furthermore, those who borrow less than $12K in undergrad loans will have their debts forgiven in 10 years instead of 20 years. Those who borrow more will also have their road to forgiveness shortened.

Will these plans be ultimately derailed by Congress or the Supreme Court? Any Congressional action is likely to be blocked by Democrats. But the Supreme Court may end up ruling again on this issue. Justice Roberts's majority opinion already noted that the Higher Education Act is insufficient to justify anything more than "limited" debt cancellation –making it likely that they will rule against these new measures once more or push the administration towards narrowing them. The administration is bracing for a fresh round of lawsuits claiming that Biden continues to act outside his responsibility to execute – not reinterpret – lawful Acts of Congress.

In the meantime, millions of borrowers are getting ready to start paying their loans again. Young adults ages 25-34 are the most likely to hold student debt, while 35- to 49-year-olds hold the largest amount of debt. But these loans held by the younger group tend to take up a bigger portion of their household budgets, and many will certainly struggle.

recent Morgan Stanley survey found that 47% of Americans making less than $50K expect that they will not be able to make all of their monthly loan payments, while 31% expect to make their payments but will have to cut back on spending. Even 43% of those making over $100K said they will be trimming their spending.

Neil Howe: Will Student Debt Resumption Tank the Economy? - survey cutspending

Americans with student loans are expected to spend less on discretionary goods like apparel, restaurants and electronics. An analysis from the investment banking firm Jeffries reported that more than a third of student debt holders’ discretionary spending goes to three retailers: Amazon (nearly 19%), Walmart (12%) and Target (6%). Discount retailers and dollar stores like TJ Maxx and Dollar Tree are far less likely to be affected.

As we await the economic and judicial fallout, it’s worth taking a step back and looking at the big picture. Regardless of whether Biden’s new strategies succeed, they make it clearer than ever that the student debt system is broken. (See “Student Debt Cancellation: Adding Fuel to the Fire” and “Student Loans Are Already a Big Loss for Taxpayers.”) Under the current repayment plans, only around 59% of borrowers with bachelor’s degrees are expected to end up fully paying off their loans. That’s already an astonishingly low share. Under the SAVE Plan, however, the Urban Institute estimates that this share will plunge even lower, to 22%.

If Biden's goal is simply to let the vast majority of student loan borrowers off the hook, it will constitute a de facto policy of paying high-priced universities with public debt financed by future taxpayers, most of whom will never go to any college. This is not merely fiscally reckless, it is blatantly unfair – and not just to future taxpayers, but to all of today's college grads who could have borrowed but refrained from doing so. What's more, these plans almost beg colleges to keep raising their tuitions into the stratosphere, since they know that students are paying with "loaned funds" that the students themselves expect to pay back only in part, if at all.

Why is Biden so determined to pursue loan forgiveness? Clearly, it's with the hopes of galvanizing young voters. However, these are precisely the voters with whom he needs the least help. In a May Reuters/Ipsos poll, Americans were closely divided on whether they supported Biden’s initial forgiveness plan (47% yes, 41% no). A policy like this risks turning off at least as many independent voters as it wins over – and even some Democrats. In today's political environment, that might make the difference between winning or losing the presidency. 

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Neil Howe is a renowned authority on generations and social change in America. An acclaimed bestselling author and speaker, he is the nation's leading thinker on today's generations—who they are, what motivates them, and how they will shape America's future.

A historian, economist, and demographer, Howe is also a recognized authority on global aging, long-term fiscal policy, and migration. He is a senior associate to the Center for Strategic and International Studies (CSIS) in Washington, D.C., where he helps direct the CSIS Global Aging Initiative.

Howe has written over a dozen books on generations, demographic change, and fiscal policy, many of them with William Strauss. Howe and Strauss' first book, Generations, is a history of America told as a sequence of generational biographies. Vice President Al Gore called it "the most stimulating book on American history that I have ever read" and sent a copy to every member of Congress. Newt Gingrich called it "an intellectual tour de force." Of their book, The Fourth Turning, The Boston Globe wrote, "If Howe and Strauss are right, they will take their place among the great American prophets." The follow-up book, The Fourth Turning Is Here, hit shelves last week.

Howe and Strauss originally coined the term "Millennial Generation" in 1991, and wrote the pioneering book on this generation, Millennials Rising. His work has been featured frequently in the media, including USA Today, CNN, the New York Times, and CBS' 60 Minutes.

Previously, with Peter G. Peterson, Howe co-authored On Borrowed Time, a pioneering call for budgetary reform and The Graying of the Great Powers with Richard Jackson.

Howe received his B.A. at U.C. Berkeley and later earned graduate degrees in economics and history from Yale University.