Payback Time

What’s going on?

US consumers could feel the pinch as student loan repayments resume, potentially putting a damper on spending.

What does this mean?

Starting October 1st, those with student loans will once again feel the weight of monthly payments, typically around $200 to $300. And for the record, this is the first time they’ll be parting with that cash since the Education Department hit the pause button back in March 2020. During that generous break, instead of chipping away at their debt, many treated themselves to luxuries like high-end TVs and spontaneous trips. So it’s no surprise that this spending spree played a part in keeping the US economy robust – even as interest rates flirted upward.

Why should I care?

For markets: No doomsday yet.

Retail behemoths like Target, Walmart, and Best Buy depend on consumers’ penchant for non-essentials, so this news has got them biting their nails. But many of these borrowers aren’t living paycheck to paycheck – and they might overlook the looming loan shadows to make room for the odd splurge. Plus, economists have pointed out these repayments are just a drop in the ocean, accounting for a mere 0.4% to 0.6% of total consumer spending. So while this move has added a slightly wobbly piece to the US’s economic Jenga tower, it’s unlikely to topple the thing entirely – especially in an era of rising wages and low unemployment.

The bigger picture: Wait and see.

Regardless of the impact, the bottom line is that government policy changes are adding unneeded volatility. To make things even tougher, auto workers’ strikes are cranking up the pressure on the economy – and with debt levels rising and folk saving less, credit card balances have hit a whopping $1 trillion. So while today’s loan repayments might seem like small potatoes, they could spell trouble down the line.

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Originally Posted September 18, 2023 – Payback Time