What student loan forgiveness would mean for U.S. consumer lenders

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The large-scale forgiveness of federal student loan debt, which President Biden could announce in the coming days, would bolster credit quality at U.S. consumer lenders, even if the action wouldn’t have a blockbuster effect.

Student loan forgiveness would free up money that consumers could instead use each month to pay back their credit cards, auto loans and other types of credit. The White House is reportedly considering writing off at least $10,000 per borrower.

“In effect, that’s a stimulus, and that’s usually good for consumer credit,” said Michael Taiano, senior director at Fitch Ratings.

“I am not considering $50,000 debt reduction,” President Biden told reporters last week. “But I’m in the process of taking a hard look at whether … there will be additional debt forgiveness.”


Just how large the impact would be is unclear, but Taiano and other analysts say it won’t be massive. Under the status quo today, most federal student loan borrowers are opting against paying back their loans thanks to a moratorium that has been in place since the start of the pandemic. An end to the moratorium —if and when it comes — could offset some of the benefits that would accrue to consumer lenders from a loan-forgiveness program.

Some consumers may also decide to spend the extra savings rather than use them to pay down debt every month, as many did during the “deleveraging” stage early in the pandemic when spending options were limited, Taiano said.

Still, forgiving $10,000 per borrower could wipe out $321 billion worth of student loans, according to a report from the Federal Reserve Bank of New York.

Some 11.8 million borrowers, or just under a third of all federal student loan borrowers, would see their balances eliminated under that scenario. The average borrower would benefit to the tune of about $8,500 in canceled loans. Around 30% of those loans that were either delinquent or in default prior to forbearance measures would be forgiven, the New York Fed found.

Details of the emerging Biden administration plan are sparse, but White House Press Secretary Jen Psaki said Tuesday that the president is considering limiting the debt forgiveness program to borrowers who earn less than $125,000. Such a targeted approach would have a smaller impact than one that did not have income limits.

President Biden has ruled out canceling loan balances of up to $50,000, an option that some Democrats have floated. The more aggressive action would cost $904 billion and eliminate federal student loan balances for 79% of borrowers, the New York Fed report found.

Biden, who is weighing issuing an executive order on the issue, said Thursday he would make a decision in the next two weeks. 

“I am not considering $50,000 debt reduction,” Biden told reporters. “But I’m in the process of taking a hard look at whether … there will be additional debt forgiveness.”

One lingering question involves the status of the student loan repayment moratorium, which the Trump and Biden administrations have continually extended and is currently scheduled to expire after Aug. 31.

Should the Biden administration choose to flip the switch this year, borrowers with more than $10,000 in balances may be put back on repayment status. For some of them, a resumption of payments may cause financial strain and reduce their ability to make payments on their bank loans, potentially offsetting some or all of the benefits they receive from student loan forgiveness.

But the vast majority of consumers appear well equipped to handle a resumption in student loan payments, said Dominick Gabriele, an analyst at the research firm Oppenheimer who covers credit card companies.

“Their ability to pay, I would argue, is better than most times in an economic cycle,” Gabriele said. He pointed to a strong job market, savings accumulated throughout the pandemic and wage increases as factors supporting consumer credit quality, even as inflation takes a bite out of earnings.

Higher savings rates in the earlier stages of the pandemic helped many consumers pay down their outstanding debt earlier, contributing to pristine balance sheets at banks and other consumer lenders.

Credit quality has started returning to more normal levels in recent months — particularly at subprime lenders — but rates of delinquencies and charge-offs remain significantly below where they were before the pandemic.

The credit card issuer Synchrony Financial is “not seeing stress” in its portfolio as credit conditions gradually return to more normal levels, Chief Financial Officer Brian Wenzel said in a recent interview.

“The consumer is in a great position to deal with some of the uncertainty that’s happening today,” Wenzel said.

Credit normalization has proceeded “very much in line with our expectations,” Discover Financial Services President and CEO Roger Hochschild said in an interview last week. The company’s net charge-off rate inched up to 1.61% in the first quarter, though it remained far below the 3.19% rate the company reported at the end of 2019.

The bulk of Discover’s business is issuing credit cards, but the company also has a sizable private student loan portfolio.

The ongoing student loan moratorium has helped keep payment rates on other loans elevated and provided a “modest benefit” to credit metrics, Hochschild told analysts last week. If the moratorium expires, Discover does not expect to see significant impacts on credit quality, he said.

For Sallie Mae, the nation’s largest private student lender, loan forgiveness or another extension of the moratorium should provide “marginal credit quality benefits,” CEO Jonathan Witter said on an earnings call.

But the moratorium and the potential for government action on loan forgiveness is also holding down demand for student loan refinancing, according to Jack Remondi, CEO of the private student lender Navient.

“What it does is it causes borrowers who have graduated and may have looked to refi their loans to sit and pause while they wait and see what the administration may or may not do here,” Remondi told analysts last week.

A similar trend is unfolding at the fintech SoFi, which also refinances student loans.

The ongoing moratorium and the potential for loan forgiveness are “temporary headwinds” that are holding down demand for student loan refinancing at SoFi, Wedbush Securities analyst David Chiaverini wrote in a research note Monday.

SoFi focuses on customers with annual incomes of over $100,000, Chiaverini noted, so any efforts by the Biden administration to target the benefits of loan forgiveness to low- and middle-income earners would diminish the plan’s impact on the San Francisco lender.


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