Wright-Patt assesses the impact of canceling student loans

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For those who see up to $20,000 in student debt lifted next year, their options as consumers will expand, a credit union official said.

However, a CUNA economist said the impact of the debt cancellation program will be mitigated as it will follow the moratorium on payments.

President Biden announced a plan Aug. 24 to forgive up to $10,000 in student loans for people with annual incomes below $125,000. For borrowers below the income cap who had qualified for Pell grants, which are given to students from low-income families, they could have up to $20,000 forgiven.

Kevin King, vice president of credit risk and marketing strategy at LexisNexis Risk Solutions, said last week that reducing student debt by $10,000 should improve consumer credit quality for many consumers. He said the plan would be a test for credit unions’ ability to understand how members are affected and meet their needs.

The Department of Education estimated that 43 million Americans would be eligible for relief and that about 27 million borrowers could receive up to $20,000 in relief. About 20 million of them will have their federal student loan debt wiped out.

CUNA senior economist Dawit Kebede said erasing up to $20,000 in student loan debt will have little impact on borrowers, as in recent years their payments have been suspended due to of the COVID-19 pandemic.

Dawit Kebede Dawit Kebede

“The expected impact on loan quality has already happened; and forgiveness will not change things from what we have seen in the last two years,” he said.

However, he said a rule proposed by Biden would have an impact. It would cap student loan repayments at 5% of borrowers’ discretionary income on undergraduate loans, up from 10% under the US Department of Education’s latest income-based repayment plan.

“The new cap, which lowers monthly payments, should make it easier for borrowers to repay their loans in the future compared to the pre-pandemic period,” he said.

“Twenty million people will have their outstanding balance canceled as a result of this action and most will see relief,” he said. “The new monthly payment cap saves individuals $1,000 per year on average. This relief allows people to allocate savings for retirement, a down payment to buy a home, or other spending priorities.

The Wright-Patt Credit Union of Dayton, Ohio ($7.2 billion in assets, 462,981 members as of June 30) does not know how many members would benefit from student loan forgiveness.

Hennessy Harris, director of indirect lending, said most members’ credit ratings had improved and the discount would help that trend continue.

“The biggest impact on scores occurred when the federal moratorium was enacted, moving members who were in default to deferment status,” Harris said. “The positive movement will come from members who have reduced their payments, who can now afford to pay off or reduce other debts. The key is that borrowers use it to pay off other debts instead of taking on new ones.

Hennessy Harris Hennessy Harris

Harris doesn’t expect the rebate to have much effect on credit union loan application “since the proposed rebate program thresholds are limited to $10,000 or $20,000,” but she did said the program can make a difference for individual borrowers.

With their debts reduced, Harris said borrowers will be able to:

  • Save extra money for retirement;
  • Treat yourself to a new or more recent vehicle;
  • Buy a house where they might not have been able to before; and
  • Pay other outstanding obligations, which in the long run will help improve their credit score.

“I think this will help members reduce their monthly obligations but not fully pay off their overall debt,” she said. “Having a lower monthly obligation will likely give members the ability to buy a car or possibly own a home, but we don’t expect to see a significant increase in demand for loans.”

As for the policy’s potential to fuel inflation, she said it was hard to know. “It will definitely help people manage their student loan debt better, but we don’t think it will cause inflation to swing wildly one way or the other.”

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