Federal Interest Rate Cuts and Student Loan Repayments: What the Changing Landscape Could Mean For the U.S. Market
RECENT CHANGES AND ANNOUNCEMENTS BY THE U.S. FEDERAL GOVERNMENT STAND TO AFFECT THE MARKET FOR BOTH LENDERS AND CONSUMERS. In a recent Equifax Market Pulse webinar, experts discussed the potential impacts of the first U.S. federal interest rate cut in over four years and the resumption of U.S. federal student loan payments. Equifax Risk Advisors Dave Sojka, Jesse Hardin, and Maria Urtubey answered these audience-submitted questions on how these events may influence the market.
Q: The market has been waiting for a rate cut, which finally came on September 18 when the Federal Reserve announced that it was cutting the federal interest rate by 50 basis points, the first cut since pre-COVID 19 pandemic.
What are your thoughts on the initial impacts of the rate cut?
Dave Sojka: Three major banks already announced that they'll be lowering their prime lending rate from 8.5% to 8%. Rates on high yield savings accounts and money market accounts will likely drop as well. We've already seen that impact on CDs, as those rates have started to drop even before the rate cut. Rates on revolving products such as bankcard and private label cards are the obvious anticipation of the cut so there is potentially some relief coming there, but slowly. And then finally, there is fintech, which is different from deposit-funded banks as they get their funding from the market and bore the brunt of the higher cost of funding as interest rates rose. That lack of funding caused them to tighten their credit standards and approve fewer loans, so it will be interesting to see if their funding improves and originations increase with the rate cut.
Q: What are the top trends you see having the greatest short-term impact from this rate cut? What should people and their organizations be paying attention to as they plan for the end of the year?
Jesse Hardin: When you look at the move, I think 50 basis points was bigger than many expected. But now it’s understood that we’re in a rate-cut environment versus a rate-increase environment, and, as a result, we will see consumers potentially pacing. Do I make a move into the market? Are we going to see more cuts? Should I buy a car or refinance my home at this point? And so, I think there is going to be some variability there for consumers and similarly in terms of pricing. Where are lenders pricing their loans, with respect to having to factor in the demand for those loans and trying to build that demand?
Q: How do you expect the student loan payment restart to impact the overall credit health of consumers?
Maria Urtubey: All federal student loan borrowers, except the 4.5 million that benefited from loan forgiveness, had their student loan payments resume in October 2023, and that was after almost three and a half years of forbearance. The twelve-month on-ramp period has granted some time to prepare for the additional obligation from a reporting standpoint. Delinquency is not resuming until this October, and theoretically, since it takes 90 days to be reported, we won't see that impact until January 2025. Some of these individuals might have opted not to make payments over the last year. Some might have not been able to make the additional obligation, and some might have continued to make payments as agreed. In terms of payment hierarchy, student loans have been relegated to the bottom of the list. I don't see or expect that to change, but those not making payments in less than 2 weeks will eventually see their scores negatively affected, and, as a result, their credit possibilities. And although student loans are held by all segments of the population, they represent a larger share of obligations among the younger and lower income groups, so they will have a harder time making those payments. The magnitude, of course, of the impact is yet to be determined.