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Wall Street warns that if the U.S. Department of Education is revoking student loan repayments, it could take billions of dollars from consumer pockets, particularly those with low-income Americans.
The department resumed its default student loan collection under President Donald Trump this month. For the first time in about five years, borrowers who have not kept up to their bills have been able to be stolen from wages or face other punishments.
JPMorgan estimated that it could reduce disposable personal income from $3.1 billion to $8.5 billion per month using a range of interest rates and repayment plans, according to Murat Tasci, a senior US economist at the bank and a Cleveland Federal Alumni.
If it all emerges in the quarter, the default collection will be reduced between 0.7% and 1.8% year-on-year, he said.
The policy change could put a burden on consumers, already underscored by Trump’s tariff plans and high prices from years of runaway inflation. These factors help explain why they closely followed consumer sentiment data compiled by the University of Michigan. Over the past two months, we have hit some of the lowest levels in our seven-year history.
“Many of these pressure points are rising,” said Jeffrey Roach, chief economist at LPL Financial. “It’s probably enough to cancel out some of these expenditures in total.”
Bank of America said this push to collecting could particularly heavily weigh groups on a more volatile financial footing. “We believe that resuming student loan payments will have a knock-on effect on the broader consumer finances, especially for the subprime consumer segment,” Bank of America analyst Mihir Bhatia wrote to the client.
Economic impact
According to Bank of America, student loans account for just 9% of all outstanding consumer debt. However, if you exclude a mortgage, that share will shoot up to 30%.
At the end of March, the total outstanding student loan debt was $1.6 trillion, an increase of $50 trillion over the past decade.
The New York Fed estimates that almost one of the four borrowers needed to make the payment is currently behind. When the federal government began reporting loans as delinquent in the first quarter of this year, the proportion of debt holders on the boat skyrocketed from about 0.5% in the previous three months to 8%.
Certainly, delinquency is not the same as the default. Delinquency refers to a loan with past payments, but the default is more specific and involves not making late payments for the period set by the provider. The latter is considered to be more serious and has consequences such as wage ornaments. If serious delinquent borrowers also defaulted, JPMorgan predicted that almost 25% of all student loans would be in the latter category.
JPMorgan’s Tasci noted that not all borrowers have wages or social security revenues to take, and that it can reduce the company’s total estimate. Some borrowers may resume payments at the start of collections, but Tasci says they are likely to eat at discretionary spending as well.
Trump’s promise to cut overtime and tip taxes, if successful, could help erase the impact of wage decorations on poor Americans.
Still, the expected blow to discretionary revenue is a concern as Wall Street wonders whether the economy can take away the recession. Whether higher tariffs push product prices higher or the labor market weakens, much hope has been placed in the ability of consumers to maintain their spending.
LPL’s Roach thinks this is not a problem. He said the post-pandemic economy is largely supported by high-income earners who have earned a large portion of their spending. This means that changing the tide of student loan holders may not hurt the macroeconomic picture much, he said.
“It’s hard to say if there’s still a consensus view on this,” Roach said. “But I don’t think the student loan story is as important as some of the other stories, because those who hold student loans aren’t necessarily a factor in the entire economy.”
