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When federal student loan payments resume this fall, they are projected to withdraw as much as $71 billion from the economy annually, with $5.3 billion attributed to Arizona. This could have real economic implications for the 43 million borrowers, including 880,000 from Arizona, who will need to start repaying their student loans after a pause of over three years enacted as pandemic relief.

Cody Hounanian, the Executive Director of the Student Debt Crisis Center, has reported concerns from borrowers, including those in Arizona, who fear they won’t be able to afford basic necessities like food, rent, and healthcare once payments restart. However, according to a Moody’s Analytics report, this economic impact would only represent about 0.4 percent of the nation’s disposable income, a relatively minor setback for the overall economy.

Moody’s economist Bernard Yaros argues that other factors such as inflation rates, interest rates, and the job market have more significant weight for the long-term health of the U.S. economy compared to the funds redirected to loan payments. Nevertheless, Yaros acknowledges that specific demographic groups will feel the impact more significantly and may need to cut back on spending to accommodate their student loan obligations.

Repayments are scheduled to restart on October 1 following a series of legislative and legal developments, including Congress preventing further extensions of the pandemic-era moratorium and the Supreme Court overturning a White House proposal for limited debt forgiveness.

President Biden, who campaigned on extensive student debt relief, has introduced alternative plans aimed at addressing congressional and judicial demands. These plans include a repayment “on-ramp” to protect borrowers’ credit scores by allowing a year of missed payments without reporting, and an expansion of an existing program that caps monthly payments for some borrowers at 10 percent of their income and forgives balances after 20 years of consistent repayment. The enhanced plan would reduce these limits to 5 percent and 10 years.

Prior to the announcement of these new plans, estimates from the Education Data Initiative indicated that Arizona’s economy would be impacted by $5.3 billion in debt repayments. While this represents roughly 1.5 percent of the state’s $350 billion gross domestic product, experts emphasize that the overall economic impact remains relatively minor.

Lee McPheters, an economics professor at Arizona State University’s W.P. Carey School of Business, points out that the policy’s effects on individuals are significant, but the broader economic consequences are limited. The average monthly student loan payment in Arizona is estimated to be around $500, roughly 8 percent of the median family income of $75,000. McPheters and Rawley Heimer, another economics professor, attribute Arizona’s comparatively lower debt to the presence of universities with affordable tuition, while acknowledging that the payments might hinder young borrowers with limited incomes and high debt burdens.

The Supreme Court’s rejection of President Biden’s debt-relief initiative is especially impactful for younger individuals who may not have benefited from longstanding government policies that aided older generations in wealth-building. Economists like Heimer suggest that facilitating intergenerational wealth transfers could yield long-term economic benefits, but concerns persist about a potential wave of student loan defaults.

Cody Hounanian, along with the Consumer Financial Protection Bureau and the Federal Reserve, expresses concern about the possibility of increased student loan defaults in the future. A June survey by the Consumer Financial Protection Bureau indicated that about one in five student debt holders face risk factors that could lead to difficulties when repayments restart. Factors like rising interest rates over the moratorium period and increased living costs exacerbate the financial challenges faced by borrowers.

Ultimately, the resumption of student loan repayments, while impacting individuals significantly, is projected to exert a relatively moderate influence on the overall economy. Concerns persist regarding the potential for defaults among certain demographics, emphasizing the need for carefully considered policy measures to manage these challenges.

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