According to Goldman Sachs economists, payments on student loans increased to pre-pandemic levels in the weeks before they resumed becoming due in October following a suspension during COVID.
Based on weekly payments to the federal Education Department, they claimed that payments increased to an annualized pace of around $150 billion, or roughly twice the pre-pandemic rate.
More than 40 million Americans have student loan debt totaling $1.7 trillion; how they manage it could be a sign of where the economy is headed. Early voluntary payments might be interpreted as an indication of clients who are financially stable, but closer examination reveals that things might not be as rosy as they seem, according to Goldman Sachs.
Payments had been ‘creeping up’ over the previous few weeks, according to Goldman Sachs analyst Alec Phillips. “People believed that it might be a more encouraging indicator for consumers and borrowers; perhaps it suggested that some people were making payments early than necessary, which is excellent because it shows they are not suffering financial difficulties. It’s difficult to understand that now that (the amount paid) is double what it was before COVID.
What caused a rise in student loan repayments?
The increase in payments is most likely the result of a tiny percentage of borrowers paying off the principal of their loans prior to interest once again collecting on September 1, according to Phillips.
“A widespread restart of monthly payments is much less reasonable, as the recent level of repayments is higher than would be expected even if all borrowers started making monthly payments early,” he said. Additionally, according to survey results, many borrowers might not make payments on time, much less two months early.
According to surveys, the majority of Americans are already struggling financially after two years of high inflation. Credit Karma conducted a poll of 2,059 borrowers in late July, and found that 53% of them were already having trouble paying other expenses, and 45% anticipated falling behind on their student loan payments once forbearance expired.
What will happen when the first installment for the borrowers is due in October?
With this another monthly bill, Americans will certainly feel more financially squeezed, but according to Phillips, “the likelihood that you have major negative effects from this are pretty low, at least for now.”
According to him, the Biden administration’s proposal for a “on-ramp” to enable borrowers in readjusting to paying off school debt should help avert catastrophe.
Borrowers won’t be reported to credit reporting agencies or deemed overdue if they skip payments during the 12-month grace period. However, interest will keep building up on their outstanding balances.
On your calendar, note:As soon as the pause is over, student loan payments will resume: Dates to keep in mind.
However, Phillips predicted that the economy would stagnate because fewer people would have money to spend. He predicts that the commencement of student loan payments will cause the pace of economic growth, which was 2.8% in the previous three months, to decrease to 1.3% in the final three months of the year.