In our August 2023 Market Pulse webinar, our risk advisors hosted a panel discussing the recent student loan repayments, financial durability, and the risks we are currently facing in this uncertain economy. Tom Aliff, Jesse Hardin, Tom O’Neill, and David Sojka represented the Equifax Risk Advisory Practice on this webinar.

Below are the answers to the audience's pressing questions. 

• To watch the full recording, click here. 

• To download the deck, click here. 

What caused student loan debt to decline prior to the income driven repayment announcement? 

Jesse Hardin: It is most likely that delinquency rates on student loans were coming down prior to the pandemic and IDR due to a host of economic factors and government initiatives. With a strong job market and strong economic growth immediately leading up to the pandemic, consumers were better positioned to make payments. We also saw a continued push for new government assistance for student loan payment relief during the period between the great financial recession and the C19 pandemic including PAYE, REPAYE, Public Student Loan Forgiveness, TEPSLF and most recently the CARES Act.

What other metrics are helpful to reduce risk in the on-ramp period, where student loan delinquencies are not reported?

David Sojka: On your portfolio: utilization rates, payment amount made vs. minimum payment

Off of you: change in utilization rates, new cards/loans opened, score change.

Has there been an assessment of how borrowers are going to approach this additional payment burden? They haven't made payments for 3 years, no bureau reporting for an additional  year, and the on again, off again potential for debt forgiveness. Is it possible that the impact will be localized to student loan portfolios with customers prioritizing other debt above their student loans? Any assessment of this?

David Sojka: Student loans will likely fall to the bottom of the payment hierarchy, especially since delinquency will not initially be reported to the bureaus, so no immediate score impact. Not all consumers will be negatively impacted. Those that still have excess savings, with good cash flow and low debt payments will be in a better position to manage the additional payments. Also, those with low student loan balances will have lower payments, so taking the previous comments into the equation, they will have less trouble managing all of their debt payments. 

Is there information on the payment due on a student loan besides just the balance? How it affects the budgeting of debt is important. How much is past due?

Tom O’Neill: Payment due information may be inconsistent initially based on reporting tendencies and the broad range of payment plan options each consumer may be eligible for. One consideration when looking to get a sense of each consumer's debt payment burden would be to layer in income data. Not only is that valuable for determining debt-to-income but it could also be used to estimate student loan payments for consumers who are on income-based payment programs.

Do you think the consumer spending resilience is due to the fact that so many homeowners were able to refi to historically low rates and therefore increase their free cash flow?

David Sojka: Consumers still have excess pandemic savings and we're still seeing wage growth, though not at the levels we saw immediately after the pandemic. So, consumers are still in a better position vs. pre-pandemic and still have shown a propensity to spend. How long consumer resilience continues is a function of all the external economic factors currently weighing on the consumer.

What is "financial durability"?

David Sojka: Financial durability is a measure of the consumer's ability to handle additional financial stress. Some consumers have more or less financial durability which may or may not be represented in a traditional credit score. Equifax is able to measure financial durability via a model that provides unique insight into households' likely ability to keep spending, plus meet current and future financial obligations, even when under financial stress.

It is clear that higher interest rates have contributed to lower origination in mortgages, for example, but does this alone account for the rise in mortgage and other delinquencies? What's the connection?

Jesse Hardin: Delinquency has been more pronounced on bankcard, personal loans and some auto loans. Inflation and other financial hardship has driven the need for more access to credit which consumers may or may not be able to repay. In the case of auto loans, some consumers ended up not being able to repay the loan due to higher rates and higher new and used automobile prices. In the case of mortgages, delinquency rates are still at historical lows, so in mortgage we see mostly deterioration in origination volume versus increased delinquency rates as a result of higher borrowing costs.

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