Credit Risk

How the Financial Industry can Assess Risk as Federal Student Loan Payments Restart

How the Financial Industry can Assess Risk as Federal Student Loan Payments Restart

July 27, 2023 | Dave Sojka


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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Dave Sojka

Dave Sojka

Risk Advisor

Dave Sojka has over 25 years of experience in Consumer Credit Risk working at institutions such as Household International, CitiCards, Alliant Credit Union, and Check into Cash. He also spent time as an analytics consultant at TransUnion. During his time at Equifax as a Risk Advisor, Dave led the development of the Ris[...]