As the United States gears up for the restart of federal student loan payments in September, millions of Americans are bracing themselves for a financial hit, according to a comprehensive study conducted by TransUnion. The credit reporting agency’s findings shed light on the potential strain on household budgets, with some borrowers facing a payment shock of at least $500 a month.
The study highlighted that, as of May 31, 2023, a staggering 40.6 million consumers were carrying student loans, collectively amounting to a staggering $1.6 trillion in outstanding balances. Among this group, approximately 26.8 million consumers, holding $1.1 trillion in federal student loan debt, are expected to face the resumption of payments after the extended moratorium. For many recent graduates since 2020, this will mark the first time they must navigate monthly repayments.
The report revealed that around half of the affected borrowers will face monthly payments exceeding $200, with almost one in five confronting payments exceeding $500. Such substantial payment obligations are expected to disrupt the financial equilibrium for many households, requiring them to recalibrate their monthly budgets to accommodate the new expenses.
Data is as of May 31, 2023. Source: TransUnion US consumer credit database
The burden of student loan payments comes as an additional challenge for US consumers, who have demonstrated resilience in their spending despite the Federal Reserve’s continuous interest rate increases over the past year. However, Adding to the complexity, many student loan borrowers have acquired other forms of debt during the pandemic, potentially at higher interest rates, according to the TransUnion study.
Liz Pagel, Head of TransUnion’s consumer lending business, warned that the accumulation of these additional credit products might present further hurdles for households as they reintegrate student loan payments into their budgets. She emphasized the importance of both lenders and borrowers being prepared for this impending payment shock.
While some borrowers may benefit from the Department of Education’s plans for student loan forgiveness, the majority will grapple with making monthly student loan payments for the first time in years. The study projected that the expected payment shock would vary across generational lines, with older generations such as the Silent Generation, Baby Boomers, and Gen Xers being more likely to encounter payments of $500 or more. In contrast, Gen Z borrowers were less affected, with only 5% anticipated to face payments exceeding $500.
The restart of student loan payments represents a significant financial challenge for millions of Americans, and as the nation transitions into a post-pandemic era, careful financial planning and preparation will be crucial for navigating these turbulent waters.