5/31/2023: Student Loan Payments Set to Resume in Late August

The debt ceiling deal is being voted by the house of representatives this evening. As part of the deal, the Biden administration agreed  not to extend the moratorium of federal student loan payments, which have been on pause since March 2020. The House Speaker McCarthy said Sunday that forbearance is costing the government about $5 billion a month. According to Bloomberg, the average monthly bill before the pandemic was $393 per borrower, and more than 40 million Americans currently have student loan debt. In other words, the treasury will bring in additional $5B of interest revenue per month from student loan payments while the US consumers will have 40M * $393 = $15.72B less to spend per month into the economy, which is roughly 1% of the total consumer expenditures. 1% is not nothing but is not a huge deal either. The supreme court hasn’t decided the fate of the student loan forgiveness program so it’s hard to predict the effect once the student loan payments resume. However, once the debt ceiling is lifted, the treasury is going to suck a lot of liquidity out of the system to replenish the treasury general account. I noticed the 6-month treasury yield has been going up in the past month and is currently yielding at 5.44%, compared to 4.86% a month ago. With a large number of debt issuances expected post the debt ceiling suspension, I wonder if we are going to see even higher yields for treasuries. Banks are either going to pay a much higher savings rate or see their deposit base dwindle further. Honestly, it’s great for savers like me. But it will be difficult for the economy as the cost of capital becomes less and less affordable, many businesses will need to cut back their investments to focus on high ROI projects.