The Intersection of Inflation & Student Loan Repayments
The hiatus of paying federal education loans back is coming to an end. Payments are due in October for the first time in over 3 years!
How does the resumption of school loan payments correlate with inflation? Honestly – I’m not sure. It’s not like this is a normal historical event that I can draw upon past examples for reference. That said, I’m thinking through logical conclusions out loud here, so please do tag along for the ride.
I grabbed a chart from USinflationcalculator.com. It shows that while inflation is definitely lower than it has recently been, it’s still elevated:
This might not seem concerning because “Hey – at least it’s going the right direction!”, but of course its going the right direction. The Fed has bombarded our economy with high interest rates. The chart from Capital Group shows just how much the Fed has increased interest rates. I really do not know how much higher rate we can afford before the housing market is crippled (my personal opinion – as always!).
Also, if you don’t feel you have a good understanding of the relationship between inflation and interest rates, read one of my fairly recent blogs HERE.
Essentially, even though The Fed is TRYING to slow down the economy, inflation is still remaining, partially due to the fact that consumers like you are I are still out there spending money. You think Americans are cutting back on spending? Not really…. As seen on this St. Louis Fed Personal Consumption Expenditures chart. Spending is trucking merrily right along.
This is where student loan payments being due again might come into play. According to Goldman Sachs, there is about $185 BILLION in student loan debt that would have been due over the last 3 years that didn’t need paid. In my mind…. A lot of people probably spent that $185 billion over the last 3 years. Sure – some increased their savings (but not a lot).
And look at this St. Louis Fed chart below. Personal savings rates have gone down, so it certainly doesn’t seem like this $185 billion was saved and invested. It’s likely been directed largely to consumer spending and consumer debt repayment.
So, my theory is that once student loan payments resume, there will be a lot of money taken out of circulation via consumer purchases. Yes, this could be a recessionary signal, but it could also help finally drive down inflation.
Only time will tell if this plays out, but I am hopeful that it will. I would prefer inflation to be controlled by any means outside having to continue increasing interest rates.
I hope my theorizing and musings were useful! Also, this is why I’m a fan of active investing. You can adapt along the way as outlooks change while staying true to your long term investment plan!