The Roadmap to Navigate Student Loans and Mitigate Risk

We are in uncharted economic territory. This month’s Market Pulse webinar is a must-listen to get ahead of the economic fluctuations we are experiencing. From detailed trends to grand-scale overviews, this holistic view of market trends will supply you with the knowledge you need to focus on moving forward. In this recap, we cover topics including:

• consumer spending,

• the state of mortgage and auto loans, 

• and, what we expect from the looming student loan debt repayment.

Our discussion starts with Amy Crews Cutts, Chief Economist at AC Cutts & Associates, sharing the current economic outlook, followed by Jesse Hardin, Risk Advisory Practice at Equifax, who details the lending and credit arenas. Rounding out timely and prescient topics are 

Tom Aliff, Tom O’Neill, and David Sojka, who represent the Risk Advisory Practice at Equifax.

Macroeconomic Observations and Updates

In a nutshell: consumer spending is holding steady, inflation is waning, but financial stresses are starting to show. 

We want to look at spending overall to see where movement is taking place, and consumer spending is above projections. Interestingly, especially when it comes to services, consumers are spending more - to the tune of almost a trillion dollars relative to June 2022. Where is this extra cash coming from? When we talk about inflation, often economists take out food and energy because they are such volatile categories from an overall spending capacity, however food and energy spending have rapidly declined. 

Additionally, we are starting to see wages above inflation. Still, we have seen a 15-year rise year over year in personal bankruptcies, but a 40% rise year over year in business bankruptcies. While it is getting closer on the business side to pre-pandemic levels, consumers are still far away from that level.

So, what comes next? The good news is, we are preparing for not when, but if a recession occurs, and we expect the Fed to begin cutting interest rates in the first half of 2024. Otherwise, we will be closely watching the serious debt ceiling conversations taking place in Washington, D.C., as well as what happens as student loan repayment begins.

Consumer Credit Insights and Trends.

As we give an overview of originations and portfolio consumer credit trends, keep in mind the data we review is lagged. This means portfolio performance information, like account balances, utilizations, and delinquencies, is based on June 2023 data, while originations are based on two months prior - in this case, April 2023. 

One thing we know: people are not buying or selling houses. Just considering first mortgages, we are still a whopping 58% below the same year-to-date period in 2022. Further, mortgage debt makes up 73% of the overall consumer debt.

Regarding other loans, auto is also down, but the news is that subprime share has fallen to slightly over 13% YTD after trending downward since 2021; it now represents the lowest subprime share in over ten years. For unsecured personal loans, we observe a steep decline in both originated balances and number of accounts in comparison to last year’s values.

Revolving debt has reached its highest levels at more than $1.05 trillion, while non-revolving debt contracted over the last two months to almost $3.5 trillion, reflecting the credit tightening we observed in auto and personal loans.

The Impact on Student Loan Debt Repayment - What We Know

The facts:

• Student loan debt is responsible for $1.5 trillion dollars out of almost $17 trillion dollars in total outstanding consumer loan debt (3rd largest behind Mortgage and Auto) based on Equifax credit trends

• Resuming student loan repayments will stress personal budgets, increasing monthly spending an average of 17% for many households, and 25% for Gen Z 

• The longer borrowers are in non-payment status, the harder it is to get a borrower to start paying again

Why should we care? What can we do to mitigate the impact?

Student loan debt repayment is something that will impact consumers’ ability to pay their obligations on other debts beyond just the student loan debts they owe. The customers who have student loans are going to be under more financial stress, which will impact other necessary spending.

In any time of economic uncertainty, it is helpful to increase the frequency of portfolio reviews. When, however, a single event occurs - one that could be a shock to the system like this - that frequency should increase. Hope is not a good financial strategy. Being proactive, however, and understanding the construct of the person within the portfolio, is the starting point to staying ahead and better mitigating risk. 

No one knows exactly what's going to happen once student loan payments begin again. While there is data available, the truth of the matter is this is a unique event and there is an emotional aspect as many borrowers probably kept their student loans out of mind for a long time. So, there is potential for a negative reaction as well as a financial one. The way to adapt in uncertain times is not to pause, but become resilient and prepared for whatever is next.

How to put insights into action.

• Understand and quantify the impact of student loans on your portfolio - which customers will be impacted and how much risk they present

• Increase the cadence of account reviews to assess changes in your customers’ credit situations and better limit losses by taking action faster

• Remove blind spots and get notifications to changes in customers’ credit that is happening outside your organization

While we are in a new arena, there are ways to overcome the unknown and become risk aware. To get all the details and information from this webinar, make sure to listen in full. You can also register for next month’s webinar on Thursday, September 21st at 2:00 pm EDT. 

To learn how to apply these recommendations to your organization, please contact the Equifax Risk Advisory Team at riskadvisors@equifax.com.