Millions of Gen Z grads have never had to pay their monthly student loan bill, considering that federal payments have been paused for more than three years. That will change soon—and it will be a "shock" for many household budgets.
That's according to Jeffries, which warns of a coming "student loan cliff." When payments resume for 45 million people, it'll be the first time a sizable portion of those borrowers will be responsible for the hundreds of dollars each month. As Jeffries notes, that will be difficult when so many are already struggling with daily expenses, given inflation and the exorbitant cost of basics like housing and food.
The average payment for those who are in good standing was close to $400 per month before the COVID-19 pandemic. Currently, they are scheduled to resume 60 days after the U.S. Supreme Court reaches a decision on President Joe Biden's student loan forgiveness plan, or 60 days after June 30, whichever is first.
Consumer spending is likely to slow when payments resume—and in turn, that will hurt the economy overall, Jeffries reports. It is also "almost certain" that delinquent payments for other types of debt will increase when households are squeezed even tighter.
"The end of the moratorium is going to be a shock to a significant number of household budgets," writes Thomas Simons, money market economist for Jeffries. "Households have already been eating into their excess savings to maintain their preferred consumption in the face of high inflation."
It's possible that the Biden administration could try to push back the repayment start date once again. But that is unlikely, according to Jeffries. And there are already legal challenges to the current payment moratorium.
The past three years have been good to student loan borrowers (at least those with federal loans). The pause has enabled many to pay down other types of debt and save for homes, or just keep up with the rising cost of living. Others have gotten closer to reaching student loan forgiveness through various programs without having to make 36 months-worth of payments.
All that upside could go away. Lilly Stuecklen has been budgeting at least $1,000 per month toward her private student loan debt throughout the pause. It's enabled her to pay down over $30,000, cutting her private loan bill in half. But now she's worried that when her federal payments resume, her progress will be stymied.
"This is a year I may have to move, and having to factor in rent and what those adjustments might be, that stresses me out," Stuecklen previously told Fortune. "At this point, it is what it is."
In fact, a February survey from Credit Karma found that more than half of respondents with federal student loans say their financial stability depends on not making payments. During the first two years of the COVID-19 pandemic, the majority of federal borrowers were not making payments at all.
How to prepare for student loan payments to resume
Biden's student loan forgiveness plan—which would cancel up to $20,000 in federal debt for most borrowers—could help soften the transition back to repayment. But experts say not to expect the program to be implemented, depending on the Supreme Court's decision.
As borrowers wait, they can make preparations for payments to resume. If it's at all possible to make a payment before the moratorium ends, that is a smart move—interest is not accruing, and the same dollars will go farther when applied against the principle balance of the loan.
If you know you will struggle to make payments, contact your student loan servicer sooner rather than later. They can help you enroll in a payment plan that makes sense for your financial situation.
This includes an income-driven repayment plan, which bases your monthly bill on income and family size. New rules may be implemented for these programs soon, which could reduce many borrowers' bills to $0 per month.
You may also be able to qualify for a different type of targeted forgiveness program, like Public Service Loan forgiveness or Borrower Defense to Repayment. These will still be available for eligible borrowers even if Biden's widespread plan is halted by the Supreme Court (at least, for now).
