Student Loan Payments Resume in October
A persistent concern among Americans this month relates to the impact of high inflation as they grapple with the resumption of student loan payments following a three-year hiatus.
The University of Michigan’s consumer sentiment index dropped 7% in October from the prior month, according to a preliminary reading released Friday. This month’s sentiment is somber when compared to historical standards, but it remains well above the all-time low recorded in June 2022 when inflation reached a four-decade high.
The director of the university’s Surveys of Consumers, Joanne Hsu, noted, “Nearly all demographic groups posted setbacks in sentiment, reflecting the continued weight of high prices.”
The overall mood of Americans toward the economy is influenced by various factors, including the ongoing conflict between Israel and Hamas, a surge in bond yields, and the stalled selection of a new congressional leader.
Bill Adams, chief economist at Comerica Bank, highlighted these concerns in an analyst note, stating, “There are many other headlines that might be worrying consumers. The impasse over the next House Speaker could be adding to fears of a government shutdown in November; the UAW strike; the restart of student loan payments; and the recent uptick in long-term interest rates could be affecting sentiment, too.”
The possibility of volatility in energy markets remains a significant concern. Inflation has been steadily increasing in recent months due to higher oil prices, which have caused retail gasoline prices to rise. The Consumer Price Index rose by 3.7% in September from a year earlier, slightly exceeding economists’ expectations. US consumers are particularly sensitive to changes in gas prices, and after a late-summer surge, the pain at the pump has somewhat eased. While this is a positive development for Americans already grappling with higher borrowing costs and inflation in various sectors such as housing, the situation could change depending on the trajectory of the Israel-Gaza conflict.
Investors are currently factoring in geopolitical risks, with a focus on the developments in the Israel-Hamas conflict and the relationship between Israel and Iran. If a clear link to Iran emerges, some analysts speculate that the United States may intervene. This intervention could involve stricter enforcement of existing sanctions on Iran’s oil exports, potentially disrupting the current oil flows to the global market. However, the ongoing uncertainty makes it difficult to predict the potential economic fallout.
While a broadening of the conflict to include Iran, Lebanon, and Syria might not have a severe impact on the United States, the inflation and growth implications for the region and the rest of the world would likely be more significant than for the US. It could lead to a risk-off environment characterized by falling yields and stock prices and rising volatility, which would further weigh on global economic activity.
The resumption of student loan payments in October is significant. The pause during the pandemic provided relief to over 43 million Americans with student loans, with the majority owing less than $40,000, and nearly one-third owing less than $10,000. The return to student loan payments is not expected to have a major macroeconomic impact, but it does mean that US consumers with student loans must factor these payments into their budgets. The average monthly student loan payment typically falls between $210 and $314, according to Wells Fargo.
Inflation expectations have also risen. Expectations for inflation in the year ahead reached 3.8% this month, up from 3.2% in September, marking the highest level since May 2023. These expectations are well above the 2.3-3.0% range observed in the two years prior to the pandemic. The prolonged period of elevated inflation is putting upward pressure on headline inflation and causing Americans to become increasingly pessimistic about inflation. The Federal Reserve closely monitors longer-run inflation expectations, which have edged up to 3% in October from 2.8% in September.
The minutes from the Fed’s policymaking meeting in September, where officials voted to maintain rates at a 22-year high, noted that “inflation expectations appeared to remain very well anchored.”
