Student loan repayments will likely crimp tax revenue

About 43 million people around the country will have to start paying back their student loans again this month after being given a more than three-year break during the pandemic. 

But borrowers will not be the only ones taking a hit in their wallets, The Pew Charitable Trusts notes in a new report.

With the resumption of loan payments, borrowers will have less money to spend on everything from groceries to beer and cigarettes. That will mean states will likely see a drop in how much they collect in sales taxes. 

An initiative announced by the Biden administration in August to lower the amount tens of millions of student loan borrowers will have to pay every month, giving them more to spend on other things, “could soften the economic blow to states,” the Pew report said.

Indeed, a separate analysis last week by Pennsylvania revenue officials found that the administration’s Saving on a Valuable Education, or SAVE, program could reduce the amount the commonwealth will lose from the resumption of the payments by about $90 million. 

But the state, which saw a spike in sales tax revenue partly because the Education Department decided to pause student loan payments in March of 2020, is still looking at losing hundreds of millions in revenue, according to the analysis by Pennsylvania’s Independent Fiscal Office.

That those with student loan debt will have to start making payments again could also have another impact, the analysis said. Because stores and restaurants will lose business, thousands of workers could also lose their jobs. As a result, the the state will collect less in income taxes as well. The fiscal office’s director Matthew Knittel said in an interview the resumption of the loan payments could “definitely” also impact cities like Philadelphia that collect their own sales and income taxes.

Overall, Pennsylvania is projecting it will lose about $72 million in sales and income taxes in the upcoming year. The amount is not huge—it collected $14 billion in sales taxes last year. But still, “we think it definitely will have an impact on revenues,” said Knittel, a former financial economist at the Treasury Department.

Other states that rely more on sales taxes could see an even bigger impact.

While Pennsylvania gets about 28% of its revenue from sales taxes, the Pew study said the resumption of loan payments could hit a state like Florida harder because a large share of its overall revenue—62%—comes from sales taxes.

Where borrowers live and how much they owe and earn will also affect the impact of loan payments. 

In Mississippi, for instance, the amount students owe makes up more of the total income of the state's residents.  Borrowers there owe on average a little more than $37,000, or about $4,000 more than the nationwide median of $33,500, the Pew report said. As a result, the amount of loans owed by people in the state makes up 16.1 % of the income of its residents—or almost double the national median of 8.5%.

In contrast, those with student debt living in Western states are spending less of their incomes on repaying their debt. Those in Wyoming spend only 4.9% of their income on repaying their loans. Those in Washington spend 5.6%  while borrowers in California spend 5.8%.

Officials in Florida and Mississippi did not immediately respond when asked if they had estimates of what the resumption of loan payments might mean.

In an attempt to address the billions students have had to take out in loans as the cost of going to college has risen, the Biden administration in August 2022 announced that the federal government would forgive about $400 billion in loans for 20,000 low- and middle-income borrowers. After the Supreme Court in June struck down the program, President Joe Biden said he would find “other ways” to reduce or cancel debt. 

According to the White House, Biden has canceled more than $116 billion in student loan debt for 3.4 million Americans, including $39 billion in debt for 804,000 borrowers that Education Secretary Miguel Cardona said have had to continue to have to make payments because the federal government “failed to keep accurate track” of their payments. 

The administration’s  SAVE program changed how the amount borrowers have to pay each month is calculated. As a result, tens of millions around the country will have to pay on average 40% less a month, and many lower-income people will not have to pay anything.

According to the White House, 4 million borrowers in September had signed up for SAVE. The Education Department was reaching out to others and believed more than 20 million would either not have to make monthly payments or would see their monthly bill reduced.

The SAVE program has improved the Pennsylvania revenue office’s estimates of the impact the resumption of payments will have on the commonwealth’s revenue. 

In an earlier study in June, Pennsylvania’s office estimated that on average, borrowers in the state owed $35,400 and would have to pay $300 a month or $6.7 billion a year to repay their loans. As a result, the state would lose $125 million in sales taxes because student loan borrowers would not be able to spend as much on other things. Because 35,1000 workers and small business owners would lose their jobs, the state estimated it would also lose $40 million in income tax revenue.

 Additionally, the revenue office learned that many, particularly higher-income borrowers, didn’t stop making loan payments during the pandemic and would not be affected by the end of the moratoriums, Knittel said.

Still, the office is estimating that the commonwealth would lose $56 million in general tax revenue, and with 19,860 people losing jobs, $16 million in income tax revenue could evaporate. 

Knittel said Pennsylvania is still trying to get a handle on how much the SAVE program will impact borrowers and how much less revenue the state will be getting.

“That's the big unknown right now. I just don't think we have a good handle on how much it is going to cut back the average payment,” he said. “We're going to be looking at October very closely because I think that's going to be the first month we really see it.”