By the Numbers
Student loan payments poised to put pressure on some consumers
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
The same legislation that lifts the US debt ceiling has also ended the 2020 CARES Act moratorium on paying student loans. Payments will restart on August 29, with additional moratoriums explicitly prohibited. With more than 60% of the $1.6 trillion in outstanding federal student loan debt now in forbearance, and evidence of a consumer struggling recently to keep up with other non-mortgage payments, a resumption in loan payments could test the credit of millions of borrowers.
The cash flow required to service debt clearly is going up in a few months for millions of borrowers. Using historical interest rates applied to the current average student loan balance, a September resumption in payments would translate to an additional $350 to $400 a month in debt service on a 10-year fixed-rate undergraduate loan (Exhibit 1). This applies to loans from either the Direct Loan or Federal Family Education Loan Program. Graduate-level federal loans typically carry even higher rates. But with undergraduate loans making up more than 92% of all student loan debt, a $350 to $400 monthly check is a representative scenario for most borrowers.
Exhibit 1: Hypothetical debt service for a recent undergrad borrower
(1) Rates for Direct Loans and Federal Family Education Loan (FFEL) Program loans
(2) Calculated on an average current federal student loan balance of $37,338 as of 1Q23
Student loans currently represent roughly 9% of the total household debt balance—compared to the 9% in auto loans and 3% in credit card balances—and an additional monthly payment will land on the consumer at a difficult time. Recent household credit data showed that the credit card 90+-day delinquency transition rate ticked up by 56 bp in the first quarter, the highest periodic increase since the first quarter of 2009. Though the rate is still well below that observed during the Global Financial Crisis, it has increased more than 150 bp in the last year and is quickly approaching pre-Covid levels, when student loan late-stage delinquency transition rates were nearly 9% compared to 0.94% in the first quarter of 2023 (Exhibit 2).
Exhibit 2: Transition into 90+ day delinquency by loan type
Note: 4 Quarter Moving Sum. Student loan data are not reported prior to 2004 due to uneven reporting
Source: New York Fed Consumer Credit Panel/Equifax
Early-stage delinquency transition rates, often a better barometer for future credit performance, are telling a similar story. For both auto loans and credit cards, the percentage of the total loan balance transitioning into 30+-day delinquency has already reached pre-pandemic levels (Exhibit 3).
Exhibit 3: Transition into delinquency (30+) by loan type
Note: 4 Quarter Moving Sum. Student loan data are not reported prior to 2004 due to uneven reporting
Source: New York Fed Consumer Credit Panel/Equifax
Some normalization in credit performance certainly makes sense coming out of a historically strong post-pandemic period, but the velocity with which retracement has occurred in auto and credit card loan performance should not be overlooked. Recent data points to a consumer who has increasingly struggled to stay current on other debt obligations, a task only made harder when the student loan payment suspension is lifted for the roughly 27 million borrowers currently in administrative forbearance. Those borrowers in forbearance now paying auto or credit card debt will feel the pressure directly. And ABS backed by loans to those borrowers should see the results in credit performance this fall.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
