Investment Strategy Brief:
The Student Loan Saga

Below is a transcript of this week’s video.

Hi, this is Ilona Vovk with Investment Strategy at Glenmede. 

Student loan debt in the United States totals over $1.7 trillion this includes federal and private student loan debt as of first quarter of 2023, according to the most recent quarterly tally by the Federal Reserve. This debt affects over 43 million borrowers with the average federal student loan debt balance of over 37 thousand dollars per person.

Student loan forbearance, which allowed federal borrowers to stop making payments without penalty, was authorized in 2020 due to the uncertainty surrounding the COVID-19 pandemic. After three years of extensions, the pause in student debt payments is set to expire this summer, with payments scheduled to resume in October. A monthly estimate of roughly $383 is expected starting in October this figure is calculated based on the average debt per borrower & average interest rate for all federal loans.

This will mark a significant change in consumer spending allocations. For example, for an individual earning an average annual income of $50,000, a $383 monthly payment would near 10% of their total spending. Assuming a $383 monthly payment for 43 million borrows as a percentage of U.S. GDP (which was approximately $25 trillion in 2022 for a full year), considering this, total student debt as a % of U.S. GPD would be about 0.7%. Now it’s important to note that the impact on GDP is likely to be more modest given expected leniency of repayments, grace period options, as well as other flexibilities. 
Although experts believe that repayments will make life more challenging for the majority of borrowers, some segments of the population — namely younger and middle-aged borrowers— will likely be more affected than others. Though student loan debt is typically associated with young age groups, the age group with the biggest amount of student debt is people from 35 to 49, with 25- to 34-year-olds being the next cohort. Together those two age groups own 70% of total student debt outstanding.  

Now, after the Supreme Court ruled against Biden’s Student Loan Forgiveness Program, which planned to cancel from $10,000-$20,000 of federal student debt for those meeting income criteria, what happens now? Federal loan payments restart, interest begins accumulating again, payments are expected to be due in October, with average payment amount is approximately $383/month., however the Education Dept. reportedly still looking to offer a grace period. 
Now, the administration has pivoted to a new income driven repayment plan. Under the new proposed plan, undergraduate borrowers will only be required to pay 5% of their income above a specified income threshold towards their loans. If borrowers do not pay their principal balance off in full after 10-20 years (timeline varies depending on the principal amount borrowed), the remaining balance will be cancelled. According to the Biden’s administration, the U.S. Department of Education is authorized to implement this plan under the Higher Education Act among other legislation, and the rulemaking process is currently underway. Now overturning this path will be difficult. Although Congress could use the Congressional Review Act, which allows it to overturn regulations by passing a resolution of disapproval by a simple majority within 60 legislative days of the rule’s publication; the likelihood of success is extremely low. If the resolution were to pass, Biden likely would veto it, and a 2/3 majority in both chambers would be required to overturn the veto. Legal challenges are possible, but the Dept. of Education has rulemaking ability to modify income repayment plans so long as minimum criteria is met which has been done in the past. The U.S. Department of Education used the regulatory authority to create Pay-As-You-Earn Repayment (PAYE) in 2011 and Revised Pay-As-You-Earn Repayment (REPAYE) in 2015.
From a timing perspective, this new repayment program is unlikely to be implemented before fall of 2023 as bringing the program live for enrollment will take time. 

So to summarize, student loans total approximately $1.7 trillion, while also affecting over 43 million borrowers in the U.S.; after several years of extensions, the pause in student debt payments is set to expire later this summer, with payments resuming in October; now the renewal of student debt payments will be felt most by 25-to-49-year-olds, who owe nearly 70% of student loans outstanding. The full resumption of student loan payments would impact GDP by as much 0.7%, but leniency and new programs could reduce that impact materially, Although the Supreme Court decision invalidated student debt cancellation, the White House has announced a more nuanced student debt relief program however it is unlikely to be implemented full in 2023.  
And with that, thank you for listening! And please don’t hesitate to reach out with any questions.

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