The next wave of impact is coming: the U.S. faces a surge in student loan defaults, which may drag down consumer spending by $63 billion

Trump will have to face another "mess" left by the Biden administration.

The Biden administration's actively used "student loan repayment pause" policy has been an invisible support for the U.S. economy during the pandemic, creating an illusion of economic stability.

However, with the official resumption of student loan repayments in September 2024, the default rate is sharply rising. The New York Federal Reserve estimates that nearly 10 million borrowers have $250 billion in overdue loans.

This could trigger a comprehensive contraction in consumer spending starting in the second quarter, particularly in automobile and durable goods consumption.

Bloomberg analysis points out that this will lead to a reduction in annual consumer spending by $26 billion to $63 billion, dragging GDP growth down by 0.1 to 0.4 percentage points.

Student Loan Defaults: An Invisible Crisis About to Erupt

In the summer of 2023, the U.S. government issued $1 trillion in debt every hundred days, becoming an "invisible fiscal stimulus." This successfully avoided economic recessions in 2022 and 2023.

Additionally, the Biden administration has actively utilized another important tool—the student loan repayment pause policy—to create an illusion of economic stability. This pandemic-era policy continues to support the U.S. economy through the "transition period" in 2024.

However, since the end of the transition period last September, the student loan delinquency rate has been soaring, and Trump will have to face this mess.

The New York Federal Reserve estimates that at the end of the transition period, 15.6% of federal student loan balances (over $250 billion) were overdue, affecting 9.7 million borrowers.

As these delinquencies appear on credit reports, borrowers' credit scores will significantly decline, and more importantly, their chances of obtaining credit will greatly diminish. Analysts believe that this will lead to a significant decline in consumer spending starting in the second quarter, particularly in the automobile and household durable goods sectors.

Economic Shock: Consumer Spending Faces Multiple Pressures

Analysis indicates that the economic impact largely depends on who defaults:

• In the worst-case scenario, if defaulters cover the entire income spectrum but are concentrated in middle to high-income households—spending will decline by $63 billion annually, primarily due to delayed purchases of automobiles and durable goods.
• Defaults among households with annual incomes between $102,000 and $175,000 will be critical. This group typically spends $6,000 to $10,000 annually on vehicles and $2,900 to $4,147 on household durable goods. According to the Bureau of Labor Statistics' 2023 Consumer Expenditure Survey, widespread credit tightening in this group could cut vehicle spending by $21 billion and durable goods spending by $9.7 billion annually.
• If defaulters are primarily low-income and subprime borrowers, the expected decline in consumption will be smaller, around $26 billion annually, mainly concentrated on reducing non-essential durable goods and vehicle purchases.

Overall, if 9.7 million borrowers default and face declining credit scores, **Bloomberg estimates that this will reduce annual PCE spending by 0.1 to 0.3 percentage points. In the worst-case scenario, by the end of the year, it could reduce PCE spending growth by as much as 0.4% It is worth mentioning that Bloomberg's basic forecast is that consumer spending will cool to a growth of 0.8% in the first quarter, far below the previous 4.0%; spending growth is expected to remain weak for the rest of the year