Starting October 1, student-loan payments are set to resume, affecting 26.6 million borrowers with an average monthly payment of $200 to $300.
According to BofA, as student loan payments resume, borrowers may struggle to repay their debt due to increasing expenses. The bank warns of a rise in delinquencies, including auto loans, credit card debt, and a higher share of seriously delinquent borrowers.
These trends indicate potential challenges in loan repayment post-pandemic. While consumers have been making payments, BofA warns of mounting financial difficulties and a return to pre-pandemic delinquency levels. Borrowers must navigate these circumstances effectively to avoid further financial strain.
Data by BofA
If student loan payments resume fully, BofA estimates a potential 67% increase in serious delinquencies, posing risks to household debt. The Consumer Financial Protection Bureau reveals that over 1 in 13 student loan debtors are behind on other payment obligations.
Not repaying student loans can significantly impact borrowers’ overall finances, as missing a payment could lower their credit score by an average of 49 to 82 points, according to VantageScore. This negative credit impact can be substantial, given the wide credit score range of 350 to 850.
It is crucial for borrowers to prioritize timely repayment to avoid such consequences. Taking proactive measures to manage student loan obligations can safeguard their financial well-being.
Consequences of Missing Student Loan Payments
According to VantageScore, missing the first payment could lead to a double-digit decrease in credit scores. On the other hand, making an on-time first payment could result in a single-digit increase.
VantageScore estimates an average credit score decline of 49 to 82 points for borrowers who miss their first payment. These figures demonstrate the significant impact of timely repayment on credit scores.
VantageScore researchers state that making the first resumed payment can lead to an average increase of 3 to 8 points in credit score, depending on variables like credit history.
Lenders heavily rely on credit scores to determine loan rates and terms for major purchases such as cars or homes. Missing a student-loan payment can significantly impact loan terms, especially during a time of rising interest rates.
It could make the difference between securing favorable loan terms or even obtaining a loan at all. Timely payment plays a crucial role in maintaining a strong credit profile and maximizing financial opportunities.
Morgan Stanley Report
According to a note by Morgan Stanley, student-loan payments will resume on October 1, affecting 26.6 million borrowers. BofA expresses concern that a full payment resumption may lead to late payments on various types of debt.
While some borrowers have made financial adjustments, BofA’s strategists and analysts are less optimistic about the situation. They anticipate potential challenges in repaying student loans and other forms of debt.
The resumption of payments poses financial stress on a large scale. It is crucial for borrowers to carefully manage their finances to avoid delinquencies and mitigate the impact on their overall financial well-being.
According to the report, an increase in seriously delinquent balances could amount to $167 billion. This would result in a 67% rise in serious delinquencies across household debt categories.
When the moratorium on student-loan payments ends, Morgan Stanley predicts a reduction in consumer spending due to tighter budgets. The report states that disposable income may be affected, leading to a moderate pullback in discretionary spending during the fourth quarter of 2023.
The end of the moratorium is expected to have significant implications for consumers’ financial capacity and spending behavior. Individuals must prepare for these changes and adjust their budgets accordingly.