August 08, 2023 | Maria Urtubey
This is the first of a two-part blog series. Look out for the second article to learn how lenders can prepare to address student loan risk.
After over a three year pause, student loan repayment is about to restart. Beginning in October 2023, over 43 million student loan borrowers will be expected to start chipping away at almost $1.5 trillion in federal student loan debt.(1)
Wow. That is a lot of money. Total student loan debt is now a close runner-up to total outstanding auto loan debt. Both of these comprise a huge percent of the total outstanding debt for U.S. consumers. Only mortgage debt is higher.
What will be the day-to-day impact on student loan borrowers? We’re forecasting a 17% jump in monthly debt commitments across every age group – and a 24% jump for Gen Z. On average, that could translate into an extra $244 that borrowers owe each month.(2) For many, that’s equivalent to a 4% to 5% pay cut off median household income.(3) Some sources estimate that student loan commitments will be much higher – up to $503 per month.(4) Either way, that’s a lot of cash that student loan borrowers have not thought much about repaying in the last few years.
Why should all lenders – and other firms – be concerned?
The resumption of student loan debt payments should be on the radar for all lenders, not just those that hold student loans in their portfolio. Telco, insurance, and energy firms should also include it on their radar. That’s because so many consumers will be affected – and it’s more than likely that a significant percentage of your customers are student loan borrowers.
Cashflow – and the ability to meet debt commitments – will be an issue for many student loan borrowers. Will borrowers be able to pay their monthly student loan bills, on top of all of the other expenses and debt commitments they already have? Many consumers took on more debt during the pandemic, especially on credit cards and auto loans.(5) Some student loan borrowers will have to choose which bills to pay first. For example, when it comes right down to it, debtors are more likely to pay their auto or mortgage loan before their student loan.
VantageScore® estimates that between 34% to 76% of borrowers will miss their first required federal student loan payment.(6) That could be because the borrower simply does not have the funds. Or maybe they decide not to pay. Or maybe they moved or changed email addresses, and their student loan bills have not caught up to them. Regardless of the reason, missing student loan payments could be an early indicator of future delinquency across all loan accounts.
Watch out for the snowball.
When it comes to tracking their credit scores, many consumers are surprisingly savvy. Student loan borrowers may be aware that delinquencies on student loan payments won’t impact their credit file until late 2024. And, that’s another reason why lenders should be very concerned – student loan borrowers can essentially skip initial loan payments without any immediate significant consequence to their credit score.
But as the months go by, what is currently a noted concern for both borrowers and lenders could turn into a huge snowball by the end of next year. Millions of consumers could experience sizable negative impacts on their credit scores if they put off paying their student loan debts. For lenders, delayed payments could mean more delinquencies across tradelines, more effort required for customer outreach, and more attention on collections prioritization. Plus, the audience for new loan acquisition offers to prime and near-prime consumers will likely shrink.
Lenders, take a look at your student loan analytics and consider these questions:
- Do you know which of your customers have student loans?
- Do you know how much student debt is owed by these customers?
- Can you calculate the percent of student loan payments to income?
- Can you assess how the resumption of student loan debt will impact customers’ overall debt to income?
- What practices do you have in place to assess risk from student loan debt today? Will they still be sufficient a year from now?
- How quickly can you respond to changes in your customers’ financial situation once student loans are added to the picture?
- Do you monitor changes in your customers’ credit behaviors outside your own firm? Would you know about a delinquency for a loan held by another lender?
- Looking back, if you knew the magnitude of a customer’s student loan debt when you were underwriting a new loan for that customer in the last few years, would you have still approved that loan?
If even one of these questions is giving you pause, then it is time to explore options to mitigate risk as student loan forbearance comes to an end. Look out for the second article in this series to learn how you can prepare. Learn about student loan market driven attributes, additional data to enhance segmentation, and the importance of frequent account reviews.
For assistance with how student loan debt will impact your portfolio, ask for a free consultation with our risk advisor experts by emailing firstname.lastname@example.org. Listen to our podcast to learn more insights from our experts about student loan related risk. Watch our video for a preview. We can help you answer questions such as:
- Which of your customers will be impacted by student loan debts?
- What is the balance of these loans?
- How much risk do they present to your firm?