Millions of consumers will have to budget for another
monthly payment in October. That’s when the federal
student loan accommodations will end after a three-year
reprieve. This will have a tremendous effect on U.S. households, as
well as the financial industry.
In the July 28 episode of the Market Pulse podcast,
I assembled a panel of my fellow colleagues, experts from the Equifax
Risk Advisory group to discuss how the financial industry can navigate
the restart of federal student loan repayments. My guests, including
Maria Urtubey, Thomas Aliff, Jesse Hardin and Tom O’Neill, provided
listeners with strategies for addressing their risks and opportunities.
Listen to the full
episode now or keep reading for an excerpt from our interview.
To set the stage, consider the current economic climate.
Since the federal student loans went into accommodation status in
March of 2020, we've seen government stimulus provide all
consumers with additional income for savings and debt reduction.
But that money has run out for many consumers. And with the rise
of inflation over the last year and a half, much of that excess
savings is gone.
We’re seeing evidence of that now. Delinquencies are on the
rise. However, many loan types are still well below historic highs,
while other products like auto have surpassed those highs. So, in
this time of economic uncertainty, with federal student loan
accommodations over and repayment resuming on October 1, what's next?
Tom, as the risk advisor for our mid-fi and credit union
clients, why is this important to this financial sector?
The primary reason is obvious. We're in a unique situation
where there's an economic event where literally overnight a vast
number of consumers will have hundreds of dollars in monthly debt
payments that they haven't been making for years now. So this will
create additional stress when paying their other obligations. And I
also want to point out that this is not dependent upon any actions
by the administration or the courts; This is a cease of those
accommodations. That debt that's been there for years, and they now
have to make payments. So regardless of what actions are or are not
taken, this is a stress that's going to hit many consumers literally overnight.
Maria, from a strategy perspective, why should your clients care?
Dave, you mentioned this affects over 40 million consumers
who have a federal student loan. So, these consumers are in your
books. In the case of the strategic finance vertical, it
represents anywhere from 15-24% of the consumer base. Some of
these segments are already struggling with rising delinquencies,
so having three to four student loans will stress them out. It's a concern.
Jesse, why is this important to your customers?
For telecommunications, energy and insurance customers in
general, they’ve had challenges with inflation. We all know that
means customers have had to speed more of their disposable income on
regular goods and services, just like Maria and Tom had mentioned.
This problem has broad impact. It's not a specific age
group, demographic or customer that holds a certain credit product.
This is pervasive. So, I think we're going to see broad exposure and
it’s going to hit lots of the portfolio.
The other thing I think about is that there’s a whole subset
of a customer base that has never made a student loan payment. So,
when you think of students who started in the pandemic and post
pandemic, they don't have that cadence of making the student loan
payment. And so working that into their daily routine will be a
challenge. And I think that's one of the things that we'll want to
as we monitor these types of portfolios moving forward.
Thomas, as the risk advisor for the auto vertical, why is
this important to your clients?
In the auto space, we’re seeing an increase in delinquency
rates. Auto is unique from an asset class because it’s a competitive
market. Often, the deal structure is done in such a way where the
dollar-weighted balance delinquencies are far lower than that of the
incident. So, it's a very risk-savvy, risk-based pricing approach. And
given the rise in delinquencies, it does cause concern in that space
because real disposable income is declining as interest rates
increase. So, there's not opportunity for refinancing. Therefore, we
expect many consumers who end up missing those payments to be impacted
from a downstream perspective as far as their potential availability
of credit and credit card. So, oftentimes what we're trying to think
about in this space is if vehicle values are holding, disposable
income comes down, and all this peripheral risk continues to rise,
will we expect the rise in delinquencies to occur at a broader base
perspective in addition to the rise that we've already seen within subprime?
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