Payments on federal student loans after a three-year pause because of the pandemic.
This change could hurt state economies by taking away some spending power of those who now have to make payments again.
鈥淎s household budgets adjust to the restart, they may have to end up tightening up their budgets, which could lead to shifts in spending patterns and habits that ultimately play out in a state鈥檚 sales tax collection,鈥� said Page Forrest, a senior associate on the Pew Charitable Trusts鈥� team.
Forrest helped author detailing how much each state鈥檚 finances may be affected by these payments resuming. It examines the outstanding federal student loans as a percentage of a state personal income, she said.
鈥淪tate personal income is essentially all of the money earned by residents in a state that is circulating in a state鈥檚 economy,鈥� Forrest said. 鈥淭his includes income, certain investments, any profits from owning a business or property.鈥�
In Missouri, federal student loans equaled 10.5% of the state personal income in the first quarter of this year. In Illinois that figure was 8.5%.
鈥淭hat number is a way for states to contextualize the size of an economic impact they might face overtime as student loan payments restart,鈥� Forrest said. 鈥淭his is not going to be an all-at-once impact, as we know student loans are repaid on a month-to-month basis.鈥�
Still, resuming payments at , could hit revenue from general sales tax and selective sales tax as people shift how they spend, she said.
鈥淚t鈥檚 possible as these ripple effects play out that the effects won鈥檛 be limited to just sales tax, but may also play out in personal and corporate income taxes down the road,鈥� Forrest said.
But there are ways to mitigate this potential challenge, including income-driven repayment plans, said Spencer Orenstein, an officer on and an author on this analysis.
鈥淚ncome-driven repayment plans really can help mitigate this impact that we鈥檙e talking about here,鈥� he said. 鈥淭hey make payments far more affordable for borrowers.鈥�
In some cases they can reduce monthly payments to $0, Orenstien said.
鈥淭hat sounds wild, and at first a lot of borrowers think that can鈥檛 possibly be the case but it is,鈥� he said.
But there鈥檚 an awareness gap, Orenstein added. Just 18% of Illinois borrowers and 20.7% of Missouri borrowers are enrolled in such programs.
The Department of Education also rolled out a that makes student loan payments more affordable than in the past.
Orenstein explained single borrowers on the plan making less than $32,800 a year would have a $0 monthly payment. That same $0 payment would apply to a household of four making less than $67,500 annually, he added.
鈥淭his is a huge improvement on many of the previous options that were affordable,鈥� Orenstein said. 鈥淪tates can think about partnering with local institutions, nonprofits who might work with folks who could benefit from this plan, just to let them know this is out there.鈥�
And these plans can also help relieve pressure on state budgets by helping those with student loans hold onto more of their money each month, Forrest added.
