The student-loan payment restart is about to put pressure on an already-fragile economy

• The economy bounced back strong after the pandemic, but is showing signs of slowing.
• The resumption of student-loan payments is expected to add further strain.
• The impact is greater on individual borrowers who cannot afford the extra expenses.

The US economy has thrived over the past three years, since the initial shock of COVID-19 gave way to a rapid recovery.

One factor that helped lead the rebound was the student-loan-payment pause enacted by the US government, which afforded borrowers more money to put back into the economy.

The payment pause was "very stimulative," Marshall Steinbaum — senior fellow at the Jain Family Institute and economics professor at the University of Utah — previously told Insider, citing the positive impact on aggregate demand.

But with those payments set to restart, an already-weakening economic picture will face another headwind. That money will now instead go straight to the Education Department and loan servicers.

The timing isn't great, considering the deteriorating economic picture. Signs have been piling up that the Federal Reserve's unprecedented interest-rate hikes are starting to bite everyday Americans. Even a still-red-hot labor market can be painted as a negative, since it fuels the argument that the Fed should leave rates higher for longer. All of this has recession calls flaring anew.

Fed Chair Jerome Powell noted himself that the resumption — accompanied by the United Auto Workers strike and high oil prices — could complicate economic recovery for the rest of the year.

Now, borrowers, the Education Department, and the overall economy are entering uncharted territory. Millions of Americans have never resumed repayment at this scale after years of relief.

Here's what banks and economists are saying about the impact of the student-loan payment resumption on the economy.

What will happen to the economy with the student-loan payment restart

It's difficult to predict how exactly the economy will respond to a surge of borrowers facing student-loan payments again — and it depends on a number of factors. For example, Wells Fargo said in a note this week it anticipates the resumption will be "a relatively contained headwind" because those who hold large balances — over $100,000 — are a small proportion of the total number of borrowers and would not have a significant macroeconomic impact.

However, the impact of the resumption could be spread over a longer period depending on how many borrowers make use of measures to ease repayment, like the 12-month "on-ramp" period during which missed payments will not be reported to credit agencies.

"Even with a relatively contained direct macro impact, repayment is coming at a time when households' staying power is dwindling, and will likely contribute to a slowdown in spending later this year and into early 2024," the note said.

Goldman Sachs had a similar prediction — it said last month it expects the resumption to "temporarily slow growth" in the fourth quarter of this year, but it depends on the scale of borrowers who choose not to resume payments right away, along with those who enroll in the new SAVE income-driven repayment plan.

The retail sector is also preparing for a strain. In an August earnings call, Macy's CEO Jeff Gennette said he anticipates the student-loan payment resumption to bring some headwinds, and Target CFO Michael Fiddelke said during the company's most recent earnings call that "the upcoming resumption of student loan repayments will put additional pressure on the already strained budgets of tens of millions of households."

What will happen to borrowers

With regards to the impact on borrowers individually, a June note from Bank of America said the resumption would likely bring "a sizeable shock," with delinquencies expected to rise in the coming weeks.

And a recent survey from Jefferies of 600 US consumers with student debt found that nearly 90% of them said they were "somewhat concerned" about meeting their monthly expenses, with half of the respondents saying they were "very concerned."

The administration has acknowledged the financial strain the resumption will have on borrowers, and their need to reconfigure their monthly budgets to meet the extra expense.

"There's a lot of anxiety out there," Under Secretary of Education James Kvaal said in September. "And some borrowers have already begun making payments. In other cases, there will be borrowers who will take some time to work student loans back into their household budgets."

Some borrowers are already feeling the strain. Helena, a 58-year-old borrower, previously told Insider that she's unable to afford her $145,000 balance and isn't sure what she'll do once her first bill becomes due.

"It's my faith. That's the thing that's sustained me," she said. "Because otherwise, if I look at the debt, it makes me feel tremendously hopeless."