Two weeks ago, in "The Great Student Loan Nonpayment Boondoggle Is Over And Household Spending Is About To Collapse", we showed how the three year-long payment forbearance had artificially boosted disposable incomes by tens of billions. And, more importantly, with repayment on said loans set to resume in a few months, personal spending was set to collapse.
Today, in a note from Barclays economist Adirenne Yih (available to pro subscribers in the usual place), the bank has published a detailed calculation of just how much disposable spending would shrink by as a result of the student loan payment restart. In a nutshell, the bank estimates a potential aggregate $15.8bn monthly headwind - or $190 billion per year - to US spending as the average student debt holder sees an incremental monthly payment of ~$390 beginning this fall. This represents an ~8% headwind to monthly personal income, affecting 16% of the US population, and adding pressure to not just consumer discretionary and apparel, but all retail spending.
For those who missed it the first time, here is the background:
Student loan payments are set to resume in the coming months. For more than 40 million Americans carrying student loan debt, the timeline to resume making payments is now on the horizon. The debt ceiling deal passed earlier this month paves the way for student loan payments to resume as early as August 29, 2023, per the latest update from the U.S. Department f Education: Federal Student Aid. For most, this will be the first time making payments since the early days of the pandemic in March 2020
Logically, Barclays regards the “essential” nature of the debt payments as reducing discretionary spending by an equal amount. As such, the bank estimates a potential aggregate $15.8bn monthly headwind to U.S. spending, as the average student debt holder sees an incremental monthly payment of ~$390 (more details below).
The analysis is based on federal student loan data for the aggregate $1.4 trillion balance across the 40.5mn borrowers by age cohort. Utilizing a 10-year payment period and a 5.8% interest rate, the bank calculates an approximate $390/month payment across cohorts.
Compared to a median pre-tax personal annual income of ~$57k, this payment represents an approximate 8% headwind to monthly income. In aggregate, this amounts to an "additional" (or rather, original, as the payments were there and then three years ago, they just stopped) $15.8bn in monthly payment for federal student loans affecting approximately 15.5% of the U.S. adult population (and 32% of the 25- to 34-year-old cohort).
As an aside, Barclays' monthly estimate of $15.8bn in incremental payments is conservative as the analysis only takes into account federal student debt (Direct Loans), which is 87.2% of total student debt.
Some more details on who owes what:
- As of March 31, 2020, there were 38.4mn recipients of Federal Student Aid (Direct Loans) equaling $1,315bn outstanding.
- As of March 31, 2023 these numbers have increased and there are now 40.5mn recipients and $1,430bn outstanding.
- Additionally, the 25-34 age group has the largest amount of borrowers at 14.7mn recipients (36%), while the 35-49 age group has the largest amount of Federal Student loans outstanding at $533bn (37%)
Average monthly repayment amount by age group:
- Federal Student Loans have 10 types of repayment plans that vary based on time frame and income
- Barclays is basing its analysis on a 10-year fixed monthly payment as it is the highest % of repayment plans by recipients (33%), and utilizing a flat assumed interest rate of 5.8%.
- From this, the bank calculates the approximate $390/month payment across age group
Cost impact of student loan repayment by age cohort
- Comparing the calculated monthly cost of student loan payments above to the median annual pre-tax personal income reveals an aggregate 8% monthly headwind to income across age group
Estimated spending impact to consumer discretionary
- Based on our analysis, the Barclays economists estimate the total impact from the resumption of federal student loans to consumer discretionary spend to be ~$15.8bn (monthly), derived by aggregating the total cost among all Federal loan holders and the Federal loan repayments.
Next, the economists calculated the total percentage of the adult U.S. population that will be impacted by the resuming of Student Loan Repayment (using U.S. Census estimates as of 2022 to calculate the total population size vs. the total amount of recipients of Federal Student Loans, and then further disaggregated that by age group). Based on calculations, 15.5% of the adult (18+) US population will be effected and will need to resume paying their student loans, with an outsized impact among the 25-34 year old cohort (32%)
Education Level by Income Bracket
- Higher household incomes are more likely to have attended college and carry higher student debt. An analysis of the Bureau of Labor Statistics’s 2021 Consumer Expenditure Survey indicatess that higher incomes are more likely to have attended college.
- While this relationship is known intuitively, it implies higher HH incomes are thus more likely to carry higher student debt compared to, say, the ‘Less than $15,000’ cohort, in which the majority of constituents did not attend college.
- In this context, and rather counterintuitively, the bank has a favorable view of companies exposed to lower HH income cohorts. For these companies, the relative insulation from the resumption of student debt payments will serve as a welcome offset to the inflation-driven spending pressure which has previously had an outsized impact on lower income HHs.