Will the end of the pause on Federal student loan repayments cause economic turmoil? We’re about to find out.
Many pandemic-era relief programs are ending this month, including the pause on Federal student loan repayment and 0% interest rates. Borrowers who have not made payments on those loans are expected to start repaying once again on the first day of October, and interest has already started accruing again.
Borrowers also did not get another source of relief they expected: the Supreme Court blocked the Biden Administration’s plan to forgive up to $20,000 in Federal student loans for those who qualified.
But most borrowers should be prepared for this moment, as it was announced that payments would begin again 60 days after the Supreme Court finalized its decision about forgiveness.
The question is: how will the end of the Federal student loan repayment pause affect the economy on a broader scale, especially when it comes to delinquencies and collections?
The Details
Federal student loans account for 92.6% of all student loan debt, affecting 43.6 million borrowers. The average total loan amount is $29,100, and the average interest rate is 5.8%. The average monthly payment on a Federal student loan is somewhere between $200 and $300, which, for most borrowers, is a sizable amount to pay monthly, especially if they haven’t been paying this bill for three years. It will undoubtedly have an impact on cash flow for most.
Refinancing, which has typically been an option for borrowers in the past, is not quite as attractive with prime interest rates over 8%. However, borrowers might consider it anyway, as a way to increase their loan terms in order to reduce their monthly payments.
The Impact
Though TransUnion expects no immediate impact to credit scores for borrowers who are restarting their payments next month, there is risk, especially for borrowers who took on new credit products during the pandemic, including the 36% who took out new auto loans, many of which could have monthly payments topping out over $500.
For the collections & recovery departments, it’s going to be critical to take some proactive steps to keep consumers from going further into delinquency as their priorities change.
Getting Prepared
A few pieces of advice, according to Quanta Credit Services:
Developing messages that encourage consumers to prioritize higher interest rate balances and to pay off their debt, especially if it’s a lower balance, before the student loan pause ends. This could include providing credit education and increasing your messaging to consumers who are in the student loan population.
Other options, according to Quanta, include proactive settlement offers, and even making a special offer to customers if the account is paid by September 30, 2023, ahead of the student loan payments beginning again. Collections & recovery departments might also opt to include messaging that indicates accounts are in a pre-legal status, where appropriate.
Above all, take a personal approach to collections. Undoubtedly, student loan borrowers will have reduced cash flow starting in October, and in order to get your debt prioritized over others, an empathetic touch that drives their attention to your debt will be key.
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