A Supreme Student Loan Crunch – WWD

The student loan crunch is back on. 

And it’s lower-income consumers who are going to be feeling the pinch most acutely as Washington’s pandemic-era debt relief plans and promises evaporate.  

First, the pressure came from the June deal to avoid crashing through the debt ceiling, which will restart student loan repayments in September and lead to an estimated $40 billion reduction in disposable income over time. On Friday it was the Supreme Court’s decision to nix President Joseph Biden’s move to outright forgive $430 billion in student debt.  

The Biden administration would have discharged up to $10,000 in student loan debt per borrower, with nearly 90 percent of the relief going to people making less than $75,000 a year. 

While the Supreme Court — or the right wing of the court — shot down the student loan forgiveness plan with a legal argument, saying the administration did not have the authority to make such a big change without Congress, it is clear that the loans have become another political football for Washington. 

“President Biden’s student loan giveaway is ruled UNLAWFUL,” crowed Republican House Speaker Kevin McCarthy on Twitter after the Supreme Court’s decision was handed down. “The 87 percent of Americans without student loans are no longer forced to pay for the 13 percent who do [have them]. This builds on the Fiscal Responsibility Act’s end to the payment pause. The president must follow the law.”

Biden, in a statement, marveled at “the hypocrisy of Republican elected officials.” 

“They had no problem with billions in pandemic-related loans to businesses — including hundreds of thousands and in some cases millions of dollars for their own businesses,” the president said. “And those loans were forgiven. But when it came to providing relief to millions of hard-working Americans, they did everything in their power to stop it.”

Regardless of the politics of the matter, the legalese or the fiscal pros and cons of loan forgiveness, the reversal amounts to added stress on lower-income shoppers who are already being squeezed by high inflation and high interest rates. 

“Consumers will need to rethink planned discretionary spending and readjust monthly budgets to account for the additional monthly expenses,” said Mike Graziano, consumer products senior analyst at RSM US, on the end of the loan forgiveness plan. “While consumer spending has remained strong over the last couple of years, we’ve seen evidence that middle- to lower-income consumers are cutting back on discretionary spending, such as apparel and footwear, as excess savings are tapped and inflation pressures spending power. Given the student loan relief plan was aimed at this customer cohort, any additional fixed monthly costs will result in additional financial pressure.”

Graziano said families planning for the back-to-school season will likely “need to rethink shopping plans,” while consumers are pushed all the more “toward discounts or shopping opportunities with lower cost providers.”

Neil Saunders, managing director of GlobalData, said it was mostly younger and lower-income households that “will need to pull back more heavily on spending once repayments resume.”

That reality could hit hard.

“The promise and subsequent cancellation of debt forgiveness may also have a negative impact on the confidence and outlooks of those affected,” Saunders said. “People will be understandably disappointed and angry about the decision, and some will be uncertain about what it means for their finances. All of this has the ability to make consumers more cautious in their buying behaviors.”

Biden moved quickly to try to blunt the impact of the Supreme Court’s decision with what the White House described as plans to open an “alternative path to debt relief” and with “the most affordable repayment plan ever created.” The Education Department is also setting up a 12-month “on-ramp” to repayment so financially vulnerable borrowers who miss monthly payments won’t immediately be considered delinquent.

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