By the Numbers

Student loan payments poised to put pressure on some consumers

| June 2, 2023

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.

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.

Jason Delanty
jason.delanty@santander.us
1 (646) 776-7873

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