How Student Loan Repayments' Return Could Squeeze Bidenomics

The end of a three-year pause on student loan repayments could affect President Joe Biden's vision for the economy—and is likely to disproportionately impact low-income borrowers, according to an economic analyst.

Interest on federal student loans started accumulating again on September 1 after a three-year pause due to the COVID-19 pandemic, and borrowers will need to start making payments again from October.

It comes as Biden has been touting his economic vision—summarized as "Bidenomics"—in the hopes that the term will stay in voters' minds ahead of the 2024 election. The White House has said Biden's plan is rooted in the idea that the best way to grow the economy is "from the middle out and bottom up," as opposed to the Republican approach that favors broad tax cuts for the wealthy.

But it will be low and moderate-income borrowers who will face the most significant challenge when student loan repayments restart, according to Emerson Sprick, senior economic analyst at the Bipartisan Policy Center, a nonpartisan organization in Washington.

"The resumption of student loan repayments isn't likely to have too big of an effect on the economy as a whole," Sprick told Newsweek.

American households are slightly better off in terms of cash in the bank than before the pandemic, Sprick said.

However, recent analysis shows that many households are quickly burning through the cash they saved during the pandemic, indicating that repayments will likely come from borrowers reducing their spending, not personal savings.

Sprick pointed to a Morgan Stanley estimate that a drop in consumer spending due to student loan repayments could lead to a 0.5 percent decrease in the real Personal Consumption Expenditure Index this fall.

"That's a real but mild drag on economic activity," he said. "However, return to repayment could have a disproportionate impact on low-income borrowers, whose outstanding debt tends to be much higher as a percentage of their income than higher-earning borrowers."

Sprick also expressed concern about the logistical difficulties the return to repayment will impose.

"Surveys show widespread confusion about when repayments will restart and how much borrowers owe, and more than 40 percent of borrowers are returning to repayment with a new loan servicer," he said. "In addition, borrowers who left college in the past three years likely haven't ever made a payment and may have trouble doing so."

He also pointed to budget woes at the Office of Federal Student Aid "at precisely the time when its customer service operations will be needed most."

The Biden administration "has taken quite a few steps to ensure that return to repayment doesn't create a financial crisis for low- to moderate-income borrowers, but those borrowers will likely bear the brunt of these logistical challenges, which certainly heightens the risk of broader economic impacts," Sprick added.

Biden has announced a 12-month grace period to help borrowers struggling after restarting payments. If they don't make payments in the 12 months after payments officially resume, they won't be at risk of default, and it won't affect their credit score. However, interest will accrue whether they make payments or not.

The Biden administration has also rolled out a new income-driven repayment plan Biden has called "the most affordable student loan plan ever."

More people will be eligible to not make repayments under the Saving on a Valuable Education (SAVE) Plan. The plan will not require borrowers to make payments if they earn less than 225 percent of the federal poverty line—$32,800 a year for a single person or $67,500 for a family of four. The cutoff for current plans is 150 percent of the poverty line, or $22,000 a year for a single person.

"Our top priority is to support borrowers and give them breathing room on their monthly payments, which is why President Biden launched the most affordable repayment plan ever—the SAVE plan," a White House spokesperson told Newsweek.

"We are also providing an on-ramp to repayment to protect borrowers who are unable to make their monthly payments initially from the harshest consequences of missed, partial or late payments. The Biden-Harris Administration has cancelled more than $117 billion in loan debt for more than 3.4 million borrowers, and we are not done helping borrowers—we will continue to find ways to give more breathing room to borrowers, cancel student loan debt, and grow the economy from the middle out and bottom up."

Biden has also pledged to forge ahead with a new plan for mass student loan cancellation after the Supreme Court struck down his original $400 billion plan this summer.

Update 9/12/23, 5:15 a.m. ET: This article has been updated to add a comment from a White House spokesperson.