Student Loan Defaults Could Reduce Consumer Spending by $63 Billion

Rising student loan defaults could reduce consumer spending by as much as $63 billion a year, according to Bloomberg Economics.

After five years of there being no “involuntary collections” on defaulted loans, the U.S. Department of Education is set to restart collections and return the student loan system to where it was before the pandemic, Bloomberg reported Friday (May 2).

This will mark the first time some younger student loan borrowers have been required to make payments, and it will end some other student loan borrowers’ hopes that the debt would be forgiven, according to the report.

Payments were paused in March 2020, and delinquent borrowers were not reported to credit agencies until October, per the report.

Beth Akers, an economist at the American Enterprise Institute, said in the report of the borrowers: “They’re facing this jarring news — that their loans, which had no consequences tied to them for five years, suddenly have very big consequences.”

The Department of Education announced April 21 that its Office of Federal Student Aid (FSA) will resume federal student loan collections on Monday (May 5).

The department said in a press release that 42.7 million borrowers owe more than $1.6 trillion in student debt, more than five million have not made a monthly payment in over 360 days and sit in default, and four million are in late-stage delinquency of 91-180 days.

In a few months, almost 10 million borrowers — making up almost 25% of the federal student loan portfolio — could be in default, the release said.

Currently, only 38% of borrowers are in repayment and current on their student loans, per the release.

“The Biden Administration misled borrowers: the executive branch does not have the constitutional authority to wipe away debt, nor do the loan balances simply disappear,” Secretary of Education Linda McMahon said in the release. “Hundreds of billions have already been transferred to taxpayers. Going forward, the Department of Education, in conjunction with the Department of Treasury, will shepherd the student loan program responsibly and according to the law, which means helping borrowers return to repayment — both for the sake of their own financial health and our nation’s economic outlook.”