The 43 million former college students who began repaying student loans this month after a three-and-a-half year hiatus likely don’t care much about how their payments will affect government tax revenue. Money they had spent on other needs now must be devoted to principal and interest on their loans.
But a study by Pew Charitable Trusts warns that government revenues could feel the effect of payments on $1.6 trillion in federal student loan debt shifting from the regular economy to loan processors. The median state’s outstanding student loan debt makes up 8.5% of personal income. States with higher levels of debt and those that depend on consumer spending for higher shares of state revenue could feel more pain, the study concludes.
One former student having to shift a few hundred dollars from discretionary spending or savings to restarted loan repayments doesn’t have much effect on the broader economy. But when millions of debtors do it after not having to make payments since the pandemic began, the impact can add up quickly.
“Anytime that people see a decrease in the amount of money in their pockets, there are potential ripple effects for state budgets because those changes are then reflected in an individual’s spending patterns,” said Melissa Maynard, the editor of the project report. “The average $236 monthly payments that borrowers were making before the pandemic were not trivial for most American households.”
The pandemic payment moratorium allowed that money to be spent on other purposes, much of it taxable, she said.
The lowest share of loan debt versus state personal income is in Wyoming at 4.9%. The highest is Mississippi at 16.1%. Minnesota has student loan debt equal to 8.2% of state personal income, a measurement of the money residents receive from work, certain investments, business income, property and benefits from employers or the government.
Minnesota relies on sales taxes for about one-third of state revenue. Pew estimates that the average loan debt for former undergraduate and graduate students in Minnesota is $33,926 and that 14.1% of residents have some student debt. About 18.5% of Minnesota student loan borrowers are on an income-driven repayment plan that calculates repayment amount as a share of income and forgives unpaid debt after a set number of years.
Pew notes that income-based repayment plans — including a new plan for lower-income students — will lessen the impact on both repayers and states. Spencer Orenstein, a researcher who worked on the study, said there is room for an increase in borrowers signing up for income-driven repayment plans. A survey Pew conducted of borrowers in 2021-22 that asked why they hadn’t enrolled in plans that can reduce monthly costs significantly found that 48% said they didn’t know they existed.
“That suggests there is an awareness gap,” Orenstein said. The Biden administration has been promoting the plans and a new plan aimed at low-income borrowers known as SAVE has enrolled 4 million borrowers in its first month. “Potentially, when we see these numbers updated, we’ll see a much-larger percentage of borrowers in (income-driven repayment) plans.”
Pre-pandemic, monthly student loan payments averaged $236 a month, Pew reported. Using credit bureau data, the study found that after enrolling in income-based repayment plans, monthly payments were, on average, $97.
“These more affordable monthly student loan payments can both help student loan borrowers manage the return to repayment and may ultimately lessen the scope of impact on states,” Pew concluded.
Maynard said the idea for the Pew analysis came from a Pennsylvania budget report on what the shift from taxable activities to loan payments would mean to state finances. It concluded that loan repayments could cost the state about $125 million a year in sales tax collections, $40 million in personal income tax receipts and $15 million in corporate income tax receipts.
“We are not meaning to imply that we expect this to open up big budget shortfalls on the part of states. It’s not to that level,” Maynard said. “It’s certainly something to pay attention to.”
Erin Campbell, the commissioner of Minnesota Management and Budget, said the current state forecast already includes the restart of payments in its sales tax calculations. It has not conducted an analysis like that done in Pennsylvania.
“Certainly it could have an impact on consumer spending,” she said. “However, for Minnesota, we assumed student loan repayments would resume about this time. So it’s actually baked into the forecast right now. We don’t anticipate it will have a major impact on the state specifically.”
The Minnesota Legislature left $1.583 billion unspent when it adopted the 2023-24 budget. The accounting close of for the previous two-year budget showed an additional $820 million in revenue in excess of forecast. The state also has a $2.85 billion rainy day savings account.
The February forecast, which will be updated next month, did two things related to student loan debt, both prescient: It anticipated that there would not be a further extension to the debt repayment moratorium and also assumed attempts by the Biden Administration to relieve some debt would not succeed.
The 2023 Legislature created a student loan ombudsperson to help residents navigate their debt. That function will be under the state Department of Commerce. The Attorney General also has a section devoted to helping borrowers with problems and issues related to loans.
There is also a program called Fresh Start, which eases the penalties for borrowers who had defaulted on payments prior to the pandemic.
The National Conference of State Legislatures has a webpage devoted to news and advice on student loans and repayments.
Another analysis of the impacts of renewed loan payments found less for state budget writers to worry about. The Federal Reserve Bank of New York conducts a three-times-a-year Survey of Consumer Expectations and included special questions about student loans in its latest questionnaire of 1,000 people. Of those, 225 reported outstanding loans who reported their debt and expected repayment costs.
“The findings suggest that the payment resumption will have a relatively small overall effect on consumption, on the order of a 0.1 percentage point reduction in aggregate spending from August levels,” the New York Fed concluded. “Across groups, we see little variation in spending responses but find that low-income borrowers, female borrowers, those with less than a bachelor’s degree, and those who were not in repayment before the pandemic expect the highest likelihood of missed student loan payments.”
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