United States consumers take out student loans in hopes that a college education for their children or themselves will contribute to a higher income later in life. The underlying assumption is that the loans they take on and later repay will provide a positive return compared to not having a college education.
Repayment may be difficult, however: After a three-year-long hiatus, federal student loan repayments will resume in October 2023, with interest to begin accruing in September. Consumers with federal student loans, who were already balancing prevailing interest rates, inflation and declining purchasing power, will now have to add one more financial responsibility to their plate. Their sentiments may further erode following the Supreme Court’s June 30 announcement striking down President Joe Biden’s student loan forgiveness plan.
This 12th edition of the “Consumer Inflation Sentiment Report” series explores the evolving consumer perceptions regarding inflation at a moment in history when federal student loan repayments, paused since March 2020, are slated to resume.
For the “Back to School Means Back to Federal Loan Repayments” edition, PYMNTS surveyed 2,236 U.S. consumers between June 7 and June 11, before the Supreme Court’s announcement, to understand their sentiments on student loan repayments recommencing and the impact it will have on their lives.
This is what we learned.
The inflation rate was 4% in May 2023, which may not seem dire on its own. However, overall interest rates have risen in the last two years, forcing higher prices and higher interest rates onto consumers. U.S. consumers’ buying power has eroded by 11% in the last two years.
Amid these factors, PYMNTS’ research indicates consumers do not expect inflation to drop back to pre-2021 levels until 2025.
While just 20% of U.S. consumers surveyed held student loans, 54% of all consumers — whether they held these loans or not — were at least slightly concerned about student loan payments, underscoring the prevalence of student loans in the social psyche. Gen Z and millennials felt the heat the most.
Among those who have student loans, 87% were at least slightly concerned about payments resuming. Those with higher loan balances were especially worried: 92.5% of those who owe more than $100,000 reported having concerns about these loan repayments resuming.
Rechanneling spending toward loan repayments will mean those funds are no longer available for other goals, such as achieving financial stability, saving money or paying bills. In fact, 46% of consumers with student loans who are at least slightly concerned about payments resuming are worried about saving money after loan payments resume. It will also mean disposable income will decline, impacting the retail industry’s revenues as the holiday season rolls around.
Consumers more closely linked to college years — those still attending high school or college or who have recently graduated — are more likely to have student loans on their minds. Most millennial and Generation X consumers have graduated and will likely be in their loan repayment years. On aggregate, about 1 in 4 Gen Z, millennial and bridge millennial consumers are more concerned about student loans than inflation.
Consumers who have federal student loans expect difficulties in their financial lives or expect to delay goals or dreams when the loan repayment freeze ends. Forty-six percent of consumers who have loans and are concerned about repayments resuming say that saving money will be more difficult, and 43% say their financial stability will suffer. The study also revealed that 36% were concerned about paying monthly bills, and 35% were worried about how to afford everyday expenses.
Many with student loans intend to pay when their turn comes. More than half of borrowers have already started paying back their federal student loans, with 31% having repaid at least 25% of their loan balances. Students still enrolled in college or graduate programs, those with a grace period or a deferment before repayment kicks in, do not need to repay loans immediately. Among consumers with student loans, 44% have not yet begun to repay them, and 17% do not plan to make payments in October 2023, possibly because they are still in school, are within the grace period or their repayment plans will not yet have commenced.
Interestingly, 8% of those with student loans do not think they will repay their loans at all. One in 10 Generation X and baby boomer and senior consumers do not plan to repay their student loans. Parents and initial co-signers of the loans most likely make up these age groups, and they may expect their children to assume the debt, absolving the parent from that responsibility. Hopes that Biden will find another way to forgive at least part of student debt may also influence this sentiment. Ultimately, failure to repay can result in negative consequences for the loan recipient, prompting lenders to seize wages, tax refunds or properties.
Federal student loan repayments have been on hold since March 2020, and are to resume in October. The resumption of payments will impact and change consumer spending behaviors, constraining loan holders’ disposable income. Understandably, 54% of consumers are at least slightly concerned about this change. Those with student loans, who have a higher loan balance or belong to Gen Z, feel the heat more strongly.
Consumers take out student loans in hopes that a college education will provide higher incomes, benefiting their children or themselves. The big picture calculation is that obtaining a college education — and the associated loans — will eventually create more income than not having that education. In the long term, most loan recipients will pay off their loans, pay down their principal to save on interest or work with lenders to arrange deferments. Some, such as teachers who work in low-income schools, will get partial repayment forgiveness. However, as the day to begin repaying loans arrives, that big picture can get clouded due to other, more immediate financial concerns such as eroding purchasing power.
“Consumer Inflation Sentiment Report: Back to School Means Back to Federal Loan Repayments,” produced independently by PYMNTS, examines and analyzes consumer sentiments on federal student loan repayment and inflation. We surveyed 2,236 U.S. consumers between June 7 and June 11 about their experiences and perceptions. The sample was balanced to match the U.S. adult population in a set of key demographic variables. Our respondents’ average age was 47.6 years old, 51% identified as female and 38% annually earned more than $100,000.
Read the June “Consumer Inflation Sentiment Report: Consumers, Cash and the Inflationary Economy” and other previous editions of the series for more.