- The strength of the US consumer could weaken later this year when student loan payments are restarted, according to Bank of America.
- The bank estimated that approximately 30 million borrowers will have to pay $200 to $400 per month.
- Student loan repayments are expected to restart in September or October of this year.
US consumers have shown remarkable resilience over the past year even as more and more people warn about a potential recession, but that could change when student loan repayments resume later this year, according to Bank of America.
Spending has held strong as consumers draw down their excess savings from the pandemic, with travel and restaurants seeing continued gains in recent months. Retail sales rose 0.4% in April, and while that was below economist estimates, it spoke to the fact that consumers are still spending their money as they hold onto their jobs.
However, this strength could weaken considerably later this year when student loan payments are restarted, according to a Tuesday note from Bank of America.
More than 43 million Americans owe $1.6 trillion in student loans, which implies about 17% of the US adult population has an outstanding loan. Student loans are now the second-largest consumer debt obligation after mortgages, and consumers haven't had to pay them for years as the government paused payments due to the pandemic.
But Bank of America said with student loan payments set to resume in September or October of this year, approximately 30 million Americans will pay $200 to $400 per month. That additional debt payment could ultimately impact consumers' spending habits and increase delinquencies on other debts, like credit cards and personal loans, according to the note.
"We view the resumption of student loan debt payments as an incremental headwind for borrowers and consumer finance companies. The resumption of a monthly obligation that has been suspended for three plus years could pressure consumer finances and weaken credit performance on other loans," BofA said.
"Adding a monthly obligation for ~30 million people has the potential to cause volatility in consumer finances that are already pressured by inflation and could also be facing higher unemployment levels. This will likely pressure spending as borrowers manage their finances and could also lend to an increase in delinquencies," the note continued.
Such a rise in delinquencies would threaten the broader economy and should increase the likelihood of an economic recession.
But while consumers, and potentially the overall economy, are the losers as students have to start paying back their loans, investors in companies like Discover and SoFi could be the winners, according to the note, as they both have exposure to student credit, whether it be their credit cards or student debt.