Set Aside Politics. Student Loan Repayment Resumption Isn’t Much of an Economic Risk

Editors’ Note: MarketMinder favors no party or any politician, assessing political developments solely for their market or economic impacts.

Nearly nine months on from stocks’ low last October, the Pessimism of Disbelief is alive and well. Good news still gets couched as bad—or soon to turn bad. Meanwhile, even the smallest potential negative is hyped far and wide as the next shoe to drop. This manifested in a huge way late last week as the Supreme Court’s ruling that the Executive Branch lacks the authority to cancel up to $10,000 in student debt (per borrower) unilaterally turbocharged fears that slowing consumer spending will fall off a student loan cliff once payments resume in October. The two things aren’t necessarily related, mind you, as payments would have resumed for many borrowers with or without the cancellation. But the coincidence of the ruling with the recent debt-ceiling deal’s resumption requirement triggered a lot of worry. We saw oodles of human interest-type pieces profiling families for whom the resumptions loom large financially. And of course all of it was laced with politics, dialing up the emotion and contention. As ever, we think it is vital to set aside all of this and take a clear-eyed look at the numbers. Do so, and we think you can see the student loan payment resumption isn’t a massive economic negative.

Whenever a story like student loans hits the zeitgeist, commentary tends to take an anecdotal approach. They find the people who best represent the story they want to tell, then portray it as if it is the normal experience rather than the single data point it is. This anecdotal evidence writ large makes for interesting reading, and we don’t doubt the issues they document are real for the individuals involved. But when it comes to putting an economic issue in context, we think it mostly adds fog. There are over 40 million student debt holders in the US, making it impossible that any two or three families’ experiences represent the most common situation.^[i]

Thankfully, there is a lot of data on student loans. How much people owe, how much they pay each month, and all stratified by age, credit store and state. The New York Fed compiles it all and publishes it annually in their Student Loan Update, which comes out every summer for the year prior. Currently, the latest file is the 2022 update, which runs through calendar year 2021. So, not the most timely data set in the world, but the numbers don’t change much from year to year, so we think it is a fine place to turn for the facts.

The big numbers here always catch the most eyeballs. Numbers like 43.5 million student debt holders and a total $1.57 trillion in outstanding balances.^[ii] Break it down, however, and it gets less scary. Because high balances can skew the arithmetic mean, we think it is more representative to consider the median balance rather than the average. For those rusty on Statistics 101, the median is the figure where there are equal amounts of results above and below, which cancels out the skew from outliers. The median student loan balance, as of 2021’s end, was $18,767.^[iii] The New York Fed provides an even more granular breakdown, showing 58.8% of borrowers owe $25,000 or less.^[iv] Those six-figure balances that get so much attention belong to just 7.6% of borrowers. A lot of them are surgeons and lawyers, supporting high balances with high income.

In other words, most people owe less than an auto loan. Per the New York Fed, there are over a hundred million outstanding auto loans in the US. Last we checked, their existence—and the few hundred dollars borrowers pay every month—didn’t imperil consumer spending. Before the emergency moratorium on payments, the average student loan payment was less than a car payment, $265.^[v] Doctors and lawyers paid more—$1,830 and $3,346, respectively, on average—but again, these folks are generally higher-income.^[vi] There might be sociological implications from their spending a mortgage payment’s worth of money on student debt every month in the first few years of their career, but it hasn’t prevented consumer spending growth in the past.

That is the other thing. The student loan payment resumption hand-wringing smacks of recency bias, seemingly ignoring that consumer spending and GDP grew just fine before the moratorium, when people were making their scheduled payments. If households could have plenty left over for discretionary spending then, why can’t they now? Yes, we know, inflation is higher now, but wage growth is catching up with last year’s inflation burst. Debt payments, meanwhile, aren’t inflation adjusted. It isn’t a perfect measure, but the BLS’s Employment Situation Report shows average weekly earnings are up 40% since February 2020, the last full month before COVID lockdowns started and the student loan payment moratorium took effect.^[vii] Don’t underestimate how much financial firepower households have accumulated during their student loan payment holiday.

We don’t dismiss the struggle some households face. But there is a lot of evidence troubles are the exception, not the rule, and stocks and economic data alike are cold to these things. Stocks care primarily about how reality compares to expectations, which we think makes student debt fears pretty darned bullish. If everyone pencils in a consumer spending student loan cliff in October, and it doesn’t materialize, that should qualify as a nice big positive surprise. Such surprises are what propel stocks up the wall of worry, and student loan payments look like another brick in this wall.