The Impact of Resumed Student Loan Payments on Household Debt

Millions of student loan borrowers will soon face the challenge of adding a monthly student loan payment to their existing household bills, such as credit cards and car loans. Since March 13, 2020, federal student loan payments have been on pause, but they are set to resume on October 1, 2023, with interest starting to accrue again in September. The Biden administration’s plan to cancel some or all of the student debt for millions of borrowers was overturned by the Supreme Court on June 30. However, the president has indicated that he is exploring new plans to address the issue.

The Average Monthly Student Loan Payment Is $203

According to Experian data, student loan borrowers will start making an average payment of $203 later this summer toward their student loan balances, assuming no further reductions due to student loan forgiveness. While this amount may not be as high as most car loan payments, it adds another financial obligation for consumers already dealing with higher costs across the board due to inflation.

Average Monthly Student Loan Payment by State

It’s difficult to imagine a good time for a new large monthly bill to arrive for most consumers, but 2023 certainly isn’t it. Consumers are already fighting inflation—especially for rental and home costs—as well as higher interest rates for loans and credit cards. Both these factors are already eating into the savings people amassed over the past few years. One silver lining: Unemployment rates remain low, so fewer consumers are experiencing disruptions in income.

Renewed Student Loan Payments Will Add to Already Growing Household Debt Burden

Household debt is growing at its fastest pace in 20 years. Higher interest rates on some of that debt, like credit cards, ensure that households may face continued pressure in paying their debts throughout the remainder of 2023. Among all generations, the percentage of household income devoted to debt repayment remains steady, according to Federal Reserve data. While this so-called debt service ratio isn’t rising overall, it is rising for some borrowers and falling for others. Most student loan borrowers are millennials, and their expenses generally rise as they age. Meanwhile, older consumers are less likely to be burdened as much by loan and mortgage payments.

Crucially, student loan payments will impact younger borrowers even more when they resume. Millennials carry nearly half of outstanding student loan debt in 2023, making them the generation that stands to bear the brunt of resumed student loan payments.

Student Loan Borrowers on Pause Improved Their Credit Scores as Much as Other Consumers

Consumers with student loan debt in 2022 have slightly lower average credit scores than the population at large, according to Experian data. As of the third quarter (Q3) of 2023, the average FICO® Score of a student loan borrower was 693, somewhat lower than the national average FICO score of 714. However, the current average score among student loan borrowers is 11 points higher than it was in 2019—roughly the same growth experienced by those without student loans.

Two factors inform the 20-point FICO® Score difference between student loan borrowers and the general population. One is the demographic difference: Most student loan borrowers are under 40 years of age (although older borrowers with student loan balances are becoming more common). While age isn’t a factor in calculating one’s credit score, the length of one’s credit history is, and longer histories are beneficial. For the most part, student loan borrowers carry and repay balances when their credit history is still in its early stages.

The second reason for lower scores among student loan borrowers is the financial burden many student loan borrowers continue to carry, even after a three-year payment pause on their loans. Although most student loan borrowers were current on their loans before the initial student loan pause in 2020, delinquencies and defaulted loans are greater for student loans than any other type of consumer loan. As making on-time payments is crucial toward maintaining and improving one’s credit score, the relatively higher delinquencies and defaults among student loan borrowers ultimately translate to lower average FICO® Scores for these consumers.

Other Offramps for Student Loan Borrowers

Despite the Supreme Court’s ruling against the loan forgiveness of up to $20,000 for those making under $125,000, borrowers still have other approaches to managing their remaining student loan balances that could at least lower some of their balances, including new programs announced by the federal government following the decision.

Public Service Loan Forgiveness programs have quietly accelerated the pace at which they’ve been granted. Currently, more than 500,000 loan borrowers received loan forgiveness, with the average loan size exceeding $68,000—many times the $10,000 or $20,000 offered to some borrowers last August. It’s possible that this program expands its reach in upcoming months.

Workplace student loan benefit programs were already beginning to take root in U.S. corporations before the student loan pause took effect in 2020. When payments resume, there’s reason to think more employers, eager to attract and retain workers, will begin to offer loan repayments as a workplace benefit—something only 7% of companies offer today. Aside from the obvious financial relief, these corporate benefits can also reduce some of the administrative headache of paying back loans, including, in some cases, making the payment directly to the loan servicer—a point of friction for some student loan borrowers.

Income-driven repayment plans are a collection of repayment plans that are keyed toward the income of the student loan borrower. They generally cap repayments based on a percentage of a borrower’s income and allow them more room to pay other household expenses. Prior to the court’s decision, there were four types of income-driven plans. Following the ruling, the Department of Education announced yet another new income-based repayment plan called Saving on a Valuable Education (SAVE), which the administration states will reduce monthly payments to zero for low-income borrowers and caps undergraduate loan repayment at 5% of discretionary income.

A new 12-month transition period is designed to help borrowers restart loan payments and avoid delinquency or loan defaults. In a statement released June 30 in the wake of the Supreme Court decision, Education Secretary Miguel Cardona encouraged borrowers to continue making payments during this grace period if they’re able to, since interest will continue to accrue.

With payments (and interest) paused throughout the pandemic, the total balance of outstanding student loan debt has declined slightly from its peak of $1.59 trillion in September 2021, according to Experian. Programs and benefits like those listed above may drive down total outstanding student loan balances even further, independent of the Supreme Court decision in June.

At O1ne Mortgage, we understand the financial pressures that come with managing student loan payments alongside other household expenses. If you’re looking for mortgage services that can help you navigate these challenges, give us a call at 213-732-3074. Our team of experts is here to assist you with all your mortgage needs and help you find the best solutions for your financial situation.