Student-Loan Borrowers Brace for a Pay Cut

Tens of millions of federal student-loan borrowers will soon owe monthly payments for the first time in more than three years. Some of them aren’t ready for it.

The payment and interest pause put extra cash into people’s pockets, but they tended to spend it rather than save it, according to recent research. Some borrowers are now concerned about being able to cover their student-loan bills this fall. Many of those who feel financially ready have started dialing back their spending on coffee, clothing and other everyday purchases.

The typical monthly loan payment will be between $210 and $314, Wells Fargo estimated using data collected in 2019. This amount is equivalent to a pay cut of about 4% to 5% off U.S. median household income before taxes, according to the Wells Fargo analysis.

Some 37 million borrowers saved about $195 billion from the pause on payments as of April 2022, the Federal Reserve Bank of New York estimated. The return of loan payments will take more of a bite out of many borrowers’ budgets than a single year of dramatic rises in inflation did. From December 2021 to December 2022, the income of a typical U.S. household decreased on average by 1% when adjusting for inflation, according to estimates from the economists Thomas Blanchet, Emmanuel Saez and Gabriel Zucman.

Spending agita

Erica Baker, a 26-year-old content strategist in Escanaba, Mich., is worried about being able to make her $300 monthly payments this fall with her current income. Baker said she sees few areas where she can meaningfully reduce her spending.

She has already started to scale back on buying coffee, but even giving it up wouldn’t make enough of a difference in her budget. “I wish I could look at my finances and say, ‘You are spending like an idiot and you can cut back in all these places, and then you’ll be able to pay your student loans,’” she said. “But I’m not.”

Apparel, entertainment and travel are the top spending categories where student-loan borrowers are more likely than the typical American consumer to say they have postponed purchases lately, according to a March survey from UBS Investment Bank.

The spending cuts that many households make in response to the payment restart aren’t expected to significantly dent consumer spending overall. “We may see a bit of a pullback in spending from particular households, but we do not expect it to broadly break the back of today’s consumer,” Wells Fargo economists wrote in a report last month.

Stacey Banks has already started adjusting her spending in advance of resuming her loan payments, which will be $552 a month. At the grocery store, she is now opting for store-brand eggs and shying away from cereal that rose in price to $7.99.

“No more Talenti for me,” Banks, a 29-year-old who works at a financial-services company, said of a high-end gelato brand that she recently stopped buying.

During the payment pause, Banks socked away most of the money she would have put toward her loans. She and her boyfriend used those savings for a down payment on a house they bought earlier this year in Forney, Texas.

‘Like a distant memory’

Rarely do consumers get a yearslong reprieve from a recurring bill. Andrew Read, a 39-year-old software engineer in Oviedo, Fla., said he has lost touch with what it was like to part with the money for his student-loan payments each month.

“It’s like a whole new bill popping up,” Read said of the $171 he estimates he will start paying in the fall. “It’s one thing skipping a payment for a few months, but it’s another thing three years later. It’s like a distant memory.”

Read said he is financially ready for the payments to resume, but not all borrowers will be. One in five is at higher risk, relative to other borrowers, of struggling to make their monthly payments after the restart, according to a report from the Consumer Financial Protection Bureau.

The Biden administration has said that borrowers who miss payments in the first year after the pause ends won’t be considered delinquent or placed in default. The administration established that plan after the Supreme Court ruled against President Biden’s debt-cancellation program in late June.

Some borrowers took the payment pause as an opportunity to save the extra money or use it to pay down other debts. But the more common response was to spend it, according to a working paper from researchers at the University of Chicago.

“A lot of households, even fairly wealthy households, behave in a hand-to-mouth fashion—they just spend whatever comes in…and take on new debt to service those payments,” said

Yannelis and his co-authors found that from April 2020 to November 2022, borrowers whose payments were paused took on 3%, or $1,200, more in credit-card, mortgage and auto-loan debt than borrowers whose payments weren’t on hiatus.

Financial dilemma

The return of student-loan payments isn’t just another line item in borrowers’ budgets. It will also change how people feel about their finances and their progress through life.

Kate Vaccaro expects to pay about $200 a month on her federal loans this fall. That will revive a question she used to struggle with before the payment pause, about whether to put in more than her required payment each month to get rid of her debt more quickly.

“Anything you’re about to spend, it’s like a guilt of, ‘Should I be spending this somewhere else?’” said Vaccaro, a 28-year-old human-resources manager at a staffing and recruiting firm in New York City.

The past three years gave Vaccaro a break from wondering which strategy would be most advantageous.

“I feel like I’ve finally been able to see what I’m missing out on that other people without student loans get to enjoy,” she said.

Write to Joe Pinsker at [email protected]