What Effect Will the End of Student Loan Forbearance Have on the Economy?

Student loans represent the second-largest source of consumer debt after mortgages, so when COVID-19 relief for federal student loans ends in August, some 43 million Americans whose loans enjoyed COVID-related forbearance will have to adjust their spending to accommodate a new minimum payment each month, according to John Burns Research and Consulting (JBREC). Loans will start accruing interest again on Sept. 1, and payments will be due starting in October, with no chance of an extension on the interest-free payment pause due to a provision in the debt ceiling deal passed by Congress on June 2.

While the student loan restart will cause a drag on the economy, JBREC says the impact of resuming those student loans will be most tangible in discretionary spending categories, creating headwinds to consumer spending later this year.

Student loan forbearance certainly helped some first-time homebuyers save up a down payment during 2020 and 2021, before the rise in mortgage rates priced them out again. However, a wave of homeowner distress seems unlikely as payments resume, since lenders have consistently been factoring estimated monthly payments into debt-to-income calculations even during forbearance. Nobody got a risky mortgage on the basis of having student loans paused.

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