Why Student Loan Debt is a Real Risk for Credit Unions
Why Student Loan Debt is a Real Risk for Credit Unions
When we speak with our credit union clients, we often bring up the potential impact of student loan debt. After all, student loans are held by over 40 million U.S. consumers and comprise about $1.5 trillion in debt.(1) Monthly payments have been on hold for over three years, but most borrowers of federal student loans have payments due again in October 2023.
Some credit unions tell us they are not concerned about student loan debt. The following are some of the comments we hear:
Our members do not hold student loans.
Our members skew older, so student loan debt is not a big factor in their financial lives.
Our members mostly have prime or super-prime credit scores; even if they have student loan debt, they will be able to meet all their financial obligations.
Our members have high incomes; they will be able to meet their student loan payments.
We have been factoring student loan debt into debt ratios throughout the forbearance period, so we are prepared.
While some of these comments may in fact be true, credit unions still need to be concerned about the potential impact of student loan payments on their membership and portfolio. Let’s explore why.
Do credit union members hold student loan debt? YES.
While your members may not hold any student loan debt through your credit union, a significant portion of them likely do hold student loan debt - at other financial institutions. This holds true even for members who have a long-standing relationship with your organization and turn to you for most of their deposit, loans, and other financial needs.
Based on several recent analyses for credit unions, we found that:
About 20% of credit union members hold a student loan with another lender.
On average, each credit union member that has student loan debt has between 3 and 4 student loan accounts.
The average current student loan debt for credit union members at organizations in our analyses ranged from about $31,000 to $43,000, or $9,000 to $12,000 per account.
Student loan debt held by credit union members can range from approximately 4% to over 10% of overall consumer debt and could potentially be much higher. The majority of student loan borrowers hold non-deferred loans in possible accommodation.
Even for some smaller credit unions, student loan borrowers on aggregate present potential risk exposure of hundreds of millions of dollars. For larger credit unions, that can potentially easily run higher into several billions of dollars. (2)
What do all of these data points mean? They mean that a significant percentage of your credit union members likely hold student loans - and they likely present risk to your organization.
They might be older, but many are still going to be impacted
The average age of credit union members is around 47.(3) But just because they are older, that does not mean they do not have student loan debt.
This may sound surprising, but there are millions of older consumers who are carrying student loans - some of whom hold student loans that helped finance their childrens’ education:
45% of student loan debt is held by consumers age 40 and over.
Almost 25% of student loan borrowers are over age 50.(4)
Over $296 billion in outstanding student-loan debt is held by borrowers aged 50 to 61.(5)
Takeway: As you are examining your portfolio for possible student loan borrowers, do not rule out older members.
Even prime and super-prime student loan borrowers may have trouble making payments
Credit unions often report to us that the majority of their members have high credit scores. While credit scores are a leading indicator of delinquency for all types of borrowers, they may not show the full picture of a borrower’s ability to meet their financial obligations. That’s where financial durability comes into play. Namely, how well can a household pay for current and future financial obligations, even when under economic stress?
Financial durability differentiates households that may have savings or other disposable income that could be used to cover expenses such as the resumption of student loan bills, from other households that do not. It’s a great way for credit unions to gain more insight on their members - even those with high credit scores.
An analysis for one credit union showed the importance of identifying high credit score borrowers with low financial durability:
Over 70% of members that held non-deferred student loans in possible accommodation had prime or super-prime credit scores.
But of student loan trades held by these high score members, about 26% had low financial durability - meaning members holding those loans would be unlikely to have the resiliency to continue spending or meet financial obligations during periods of financial stress.(6)
Not only might these members have trouble meeting their incremental student loan bills, they may have trouble meeting some of their other debt commitments as well. Combine these members with other student loan borrowers that have both low credit scores and low financial durability, and a credit union could end up with a huge impact to their portfolio.
High incomes may not cover student loan debt commitments
The resumption of student loan payments is expected to result in a 17% jump in monthly debt commitment across every age group. That will potentially put a huge amount of stress on personal budgets, especially among the Gen Z population which could have on average a 24% increase in monthly debt payments.(7)
Student loan payments could translate into an extra $244 that borrowers owe each month.(8) For some, that’s equivalent to a 4% to 5% pay cut off median household income.(9) Some say that student loan bills will be much higher - up to $503 per month.(10)
On top of increased debt commitments, other factors come into play - even for high earners. Consumers that had student loans in forbearance are not used to paying them; instead they may have been spending any extra income on travel, dining out, or other leisure activities. Since 2021, consumer spending has exceeded real disposable income.(11) The savings rate is now at a historical low of 3.5% (that’s compared to 35% during COVID-19!).(12) So even if members with student loans have high incomes, at least some will struggle to keep up with mounting debts. This could spell trouble for credit unions.
Even if you think you stayed on top of student loan debt, broader factors may be at play
Some credit unions proactively addressed student loan debt during the pandemic through enhanced debt-to-income analytics and other analyses. However, there have been a lot of changes in the economy and to the consumer wallet during that time - including inflation and high interest rates, plus some consumers taking on more debt during the shut-down. Younger consumers, especially now, may face higher mortgage and auto payments.
Plus, while your credit union may have been conscientious about extending new credit to your members over the past few years, other firms may have used a different set of criteria. All of these factors mean that your members could potentially have more risky debt than you realize.
Tips to stay on top of student loan debt
What can credit unions do to stay on top of their members’ finances as federal student loan payments resume? Here are some tips:
Determine which of your members have student loans.
Increase the frequency of your account reviews. Focus on members that have taken on new credit, increased utilization, only made minimum payments, recently missed payments, or experienced credit score changes.
Analyze members’ financial durability and resilience to meet debt commitments.
Monitor your members’ deposit accounts and watch for significant changes.
Continue to maintain close ties with your members and reach out early to segments that may present increased risk. Consider providing financial education or counseling, or offering modified repayment plans, refinancing, or debt consolidation options.
Credit unions should act now to assess the potential impact of student loan debt on their portfolio and across their member-base. To get started, ask for a free consultation with our risk advisor experts by emailing riskadvisors@equifax.com. Plus learn more about financial durability and listen to our most recent student loan podcast.
Equifax Credit Trends, August 25, 2023.
Equifax analytics, 2023.
Credit Union Insight, June 2022.
Equifax Portfolio Credit Trends, July 26, 2023.
StudentAid.gov as reported by Wall Street Journal, October 3, 2023.
Equifax analytics, 2023.
The Student Loan Crisis, Shur℠, VantageScore® and Equifax, 2022.
The Student Loan Crisis, Shur℠, VantageScore® and Equifax, 2022.
Wall Street Journal, July 15, 2023.
Education Data Initiative, May 30, 2023.
Bureau of Economic Analysis, July 2023, as reported by Keybridge Research LLC, 2023.
Federal Reserve Bank of New York, July 2023, as reported by Keybridge Research LLC, 2023.
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