The fragile post-pandemic US economic recovery is bearing down on a $1.604 trillion student debt roadblock as a pause on payments is set to end in the fall.

Interest accrual on student loans will resume in September, more than three years after a pause was first enacted in March 2020 as a COVID-19 economic relief measure. Payments will be due starting in October, the Department of Education has announced, part of a debt limit deal passed by Congress which prevents further extensions of the payment pause.

The expiration comes at a precarious time for US household finances, as millions of Americans have fallen delinquent on their credit cards and auto loans, personal savings rates have plunged and access to credit has tightened amid rising interest rates. Separately, the Supreme Court is expected this month to rule on a challenge to the Biden administration's plan to forgive up to $20,000 in student debt. Together, the actions will determine just how much damage is done to US household finances and the economy at large.

"Personal finances will be squeezed and confidence will be hit with households either running down savings more quickly or having to adjust their spending behavior," said James Knightley, chief international economist with ING. "In addition to higher interest rates and tighter lending conditions, this will be another headwind that slows the economy and helps dampen inflation pressures more quickly."

'The equivalent of a sizable tax hike'

Outstanding federal student loan debt grew to $1.604 trillion at the end of the first quarter, up by $1.025 trillion from the first quarter of 2008, according to the latest data from the Federal Reserve Bank of New York. Including private student loans, which were not subject to the pause, the total debt pile grew to about $1.774 trillion at the end of the first quarter of 2023.

About 1 in 5 US adults have student loan debt and the average household with student debt owes $58,238, according to a study by NerdWallet, released in January.

For adults making student loan payments in 2019, the typical required monthly payment was between $200 and $299, according to a Fed study.

"If there is no debt forgiveness and millions of Americans end up having to find an extra $200 to $400 per month, that has the potential to be quite a big hit to consumer spending," said Knightley with ING. "It is the equivalent of a sizable tax hike."

Some cracks

Federal student loan payments account for less than 0.5% of median US household income but will resume as many Americans with outstanding student loans are already falling behind on their mortgages, credit card and auto loan payments, said Tracy Chen, portfolio manager for Brandywine Global.

"We're already seeing some cracks," said Chen.

Serious credit card delinquency rates, the share of balances late by 90 days or more, rose to 8.31% in the first quarter of 2023 for Americans ages 18 through 29, up 319 basis points from first quarter 2022 and hit 6.27% for those ages 30 through 39, up 208 basis points over the same stretch, according to the latest Fed data.

Americans 18 to 29 years old held about 20% of all federal student loan debt in first quarter 2023, while Americans in their 30s held about 32%.

Serious auto loan delinquency for 18- to 29-year-olds hit 4.55% in first quarter 2023, the highest rate of late payment since the fourth quarter of 2009. For Americans in their 30s, it was 3.06%, the highest level of serious delinquency since the third quarter of 2010, the data shows.

The rise in overall consumer loan payment delinquency is likely problematic for student loan payments, which are often seen as a low priority for Americans faced with stretched finances, Chen with Brandywine said. Consumers will instead likely pay their auto loan bills over fear their car could be repossessed or their mortgage to avoid foreclosure.

"Student loans are at the bottom of the ladder," said Chen.

Inflation hit

The resumption of payments could mark a modest win for the Federal Reserve, as central bank officials would likely prefer Americans to pay down student loan debt over spending more on goods and services and, in turn, driving persistently high inflation up more.

"It's another vector in which you're sucking money out of the economy," said Joseph Politano, an economic analyst at Apricitas Economics.

Still, the restart of payments will likely hurt consumer confidence and weaken some consumer-driven portions of the economy.

"Your average person is going to feel this as another squeeze on their real living standards at a time when people are understandably upset about prices," said Politano.

If the Biden loan forgiveness plan is struck down by the court, the resumption of student loan repayments will subtract about 0.2 percentage points this year from personal consumption expenditures, the Fed's preferred inflation measure, according to a June 1 forecast from economists at Goldman Sachs. If the Biden plan stands, the resumed payments will subtract 0.1 percentage points from PCE, according to the forecast.

Ending student loan forbearance will increase consumer interest payments by about $38 billion annually, according to government estimates. If that comes out of just consumer spending it would reduce US GDP by 0.14%, according to an analysis by Joel Prakken, chief US economist at S&P Global Market Intelligence. If those payments come out of personal saving the impact on GDP would be even less, Prakken said.

"So, pretty modest in the aggregate, but certainly more onerous for some individuals," Prakken said.

A cushion

Tiffany Carlock, a health insurance director in Maryland, has been paying $200 per month despite the March 2020 federal pause in order to reduce the principal balance on her student loan.

"The loan pause significantly reduced my stress," Carlock said. "It also gave me a cushion because I knew payment wasn't due by a certain date, therefore I was able to make payments on my own terms. It has actually been satisfying over the last 2 plus years to see my principal balance go down."

However, Carlock said home ownership hopes will likely be complicated if the Supreme Court strikes down the Biden administration's loan forgiveness plan.

"That is $200 per month that I could save towards a new home," Carlock said.