With 27 Million Set to Resume Payments, Many Student Loan Borrowers Already Managing Increased Debt Since Pre-Pandemic
New TransUnion study shows that one in five of those borrowers are set to add a payment of $500 or more
The average consumer with a student loan carries about $35K in debt. Many of these consumers have also acquired new credit products over the course of the past three years, growing their debt level and cross wallet monthly payments since student loan forbearance started. A new TransUnion (NYSE: TRU) study, “Implications of the End of Pandemic-Era Student Loan Forbearance,” found that, as student loan payments resume in September 2023, many borrowers may find themselves facing the challenge of having to manage these payments for the first time amidst a more expensive monthly debt portfolio.
The U.S. Department of Education has directed that student loan delinquencies not be reported to the credit bureaus for 12 months until September 30, 2024, helping to protect consumers’ credit as they manage these new payments. The TransUnion study looked at the anticipated impacts of these restarted payments on consumers’ wallets.
TransUnion’s study found that as of May 31, 2023, 40.6 million consumers possessed student loans, totaling $1.6 trillion in balances. From this group, approximately 26.8 million consumers with federal student loan debt totaling $1.1 trillion are expected to be faced with a resumption of payments for the first time since the beginning of pandemic-related payment moratorium, or for the first time ever if they were not in repayment prior to the moratorium. Many students with private student loans did not have a payment holiday.
While current Department of Education plans for student loan forgiveness could alleviate payment requirements for some borrowers once finalized, most of this group will be facing monthly student loan payments for the first time in years. These borrowers will experience a payment shock as they attempt to recalibrate their monthly budgets to accommodate this new payment.
The majority of consumers with a student loan have not been required to make payments for the better part of three years. Payment amounts will vary, but many of these consumers have taken on additional debt since the last time they had to pay their student loans. It’s important for both lenders and consumers to be prepared for this new payment shock.
Student Loan Borrowers Increased Debt Loads on Other Credit Products During the Pandemic
One of the key reasons why student loan borrowers may be particularly vulnerable to payment shock can be found in the number of borrowers who have opened new credit products since the beginning of the pandemic.
During the Pandemic, Consumers With Student Loans Added New Debt
Percentage of Student Loan Borrowers Taking On New Product
Unsecured Personal Loan
Source: TransUnion US consumer credit database; data is as of May 31, 2023; trade defined as opened during the pandemic if opened on or after March 31, 2020.
“These additional credit products mean additional monthly payments, the accumulation of which may pose added challenges for households attempting to reintegrate student loan payments into their monthly budget,” added Pagel.
While the Department of Education has offered a 12 month runway before student loan delinquencies will have an impact on consumer credit files, interest will begin to accrue immediately so it is in the best interest of consumers to resume payments right away.
Payment Shock Impact on Student Loan Borrowers
TransUnion’s study analyzed consumers who will experience a payment shock across a range of dimensions. These areas included generational breakdowns and credit risk ranges to determine how large their expected student loan payments will be once they are restarted.
The study showed that about 50% of consumers who will experience a payment shock are expected to have a payment of more than $200 a month and about one in five will see payments of more than $500.
The study also showed that these figures did not vary significantly when viewed across credit risk tiers. For instance, between 18% and 20% of borrowers had payments of more than $500 over each risk tier. There was, however, some divergence when looking at the data across generations, as the Silent Generation, Baby Boomers and Gen Xers were more likely to have payments of $500 or more, while Gen Z borrowers were significantly less likely, with only 5% expected to have payments of more than $500.
Older Consumers Are Expected to Have Higher Student Loan Payments Due Than Their Gen Z Counterparts
Percent of Consumers with Payments < $200
Percent of Consumers with Payments > $500
Source: TransUnion US consumer credit database; data is as of May 31, 2023.
“Regardless of credit risk range, the sudden addition of a new regular monthly payment on top of existing obligations can prove challenging for any household,” said Margaret Poe, head of consumer credit education at TransUnion. “It’s important that student loan borrowers who know or anticipate that their payments are likely to resume soon should begin assessing their monthly budgets, making any needed adjustments as soon as possible to help mitigate the impact of these payments.”
To learn more, click here to register for our upcoming webcast, “Implications of the End of Pandemic-Era Student Loan Forbearance.”
To better understand how a student loan payment shock may impact a consumer wallet, lenders can leverage TruVision Premium Student Loan Attributes, TruVision Trended Usage Payment Ratio Algorithms and TruVision Trended Liquidity Algorithms.