What Biden’s promise to provide student loans means to consumer lenders
If President-elect Joe Biden executes his plan to cancel federal student loan debt at a flat rate, banks, credit unions, and other consumer lenders can benefit.
Almost certainly, U.S. consumers burdened with federal educational debt would have more cash to spare to make payments to credit card, auto, and home student lenders, all of whom expect a surge in defaults as the pandemic recession drags on . Americans whose student debt has even been partially canceled would also have more opportunities to get new loans, potentially meeting demand for auto loans and mortgages.
“Indeed, it’s a way of generating momentum,” said Mike Taiano, an analyst at Fitch Ratings.
But the banking industry doesn’t support the idea. An industry group notes that the Biden Plan would do nothing to help manage the college’s spiraling costs. Basically, the granting of loans – even by the federal government – is not an intuitive idea for private lenders.
In the third quarter, Americans owed $ 1.55 trillion in student debt, with federal loans making up more than 90% of the total.
Biden is proposing debt relief to provide consumers with some relief from the COVID-19 crisis, but the impact of his plan would be long-term as federal student loans typically run for 10 years. Unlike one-time government checks, which provide short-term relief, debt relief would amortize or reduce monthly payments over a period of years.
The waiver of federal debt to students would, in a sense, work like an extension of the short-term deferral offer that has been available since the Coronavirus Relief, Aid and Economic Security Act was passed last spring. According to one analysis, only 11% of borrowers have federal student loans made their monthly payments in the autumn.
The federal student loan payment hiatus recently extended to the end of January has helped private lenders weather the 2020 storm. Around 29% of federal borrowers have used their savings to pay off other debts, according to a recent survey The Harris Poll conducted on behalf of NerdWallet.
In October, Sallie Mae CEO Jonathan Witter stated that the eventual end of the federal government’s leniency offer would have negative economic consequences. “This additional payment burden can lead to increased financial distress,” he said during the private student lender’s recent conference call.
Witter estimates the average Sallie Mae borrower owes $ 400 a month on government student loans. That sum is more than enough, given the ongoing payment vacation, to cover the $ 277 the average borrower owes Sallie each month on private student loans.
A recent survey of 58,000+ student loan borrowers confirms the notion that if Americans repay their federal student loans, they are likely to miss out on more payments to private lenders.
According to a survey conducted by Savi, a startup helping borrowers reduce their educational debt, and advocacy, 77% of respondents said they don’t feel financially secure enough to start making payments on their federal student loan in the group student debt crisis.
“I still think there are major concerns about the resumption of payments,” said Aaron Smith, a co-founder of Savi.
The economic benefits of Biden’s debt relief plan would depend on its size. The former vice president has spoken out in favor of lending all federal student loan borrowers $ 10,000, which would eventually lead to Total consumer savings of approximately $ 370 billion. This approach would help many Americans who went to college but didn’t graduate and therefore didn’t enjoy the raise that usually comes with a degree.
Borrowers who haven’t completed their education face a predicament much like people who take out a car loan only to see the vehicle stolen, said Chris Keveaney, a former manager of JPMorgan Chase who is now the CEO of the educational loan startup Meritize.
“You don’t have the car, that was the security for the loan, and you still have to pay for it. It’s going to be a very untenable situation, ”said Keveaney. “In my opinion, that should be the focus.”
But some Democrats in Congress want to cancel much larger debts. Student loan waivers have become a hot topic in progressive circles as it is a form of business development that could arguably only be achieved by the executive branch without the approval of the Republicans in the Senate.
Senator Elizabeth Warren, D-Mass., Chair of the House Financial Services Committee, Maxine Waters, D-Calif., And other prominent Democrats want the President-elect to award up to $ 50,000 per borrower. This plan would blow a bigger hole in the federal budget and its benefits would benefit more wealthy people. But it would also have greater stimulatory effects than not giving out more than $ 10,000 per borrower.
“Cancellation of student loan debt would help boost our troubled economy and fill the long-running racial wealth gap,” Warren said earlier this fall.
The mortgage industry in particular could benefit from extensive student debt relief. Between 2005 and 2014, more than 400,000 young Americans didn’t buy a home because they were burdened with student debt, so Federal Reserve research released last year.
However, groups in the banking industry do not support proposals to cancel student debt from the federal government. When Warren and Rep. James Clyburn, DS.C., unveiled a debt relief bill prior to the pandemic, the Consumer Bankers Association condemned the plan as short-sighted and bad for taxpayers.
The CBA found that debt relief would do nothing to reduce the rising cost of college, which has contributed to what recent data from the Federal Reserve Bank of New York shows that outstanding student debt has decreased over the past decade increased about 100%.
There is also the possibility that federal student loan waivers could pave the way for similar treatment of privately secured educational debt. In addition to Sallie Mae, Discover Financial Services, Citizens Financial Group and PNC Financial Services Group are among the banks in the private student loan market.
In a letter to Biden last week, Waters endorsed large-scale federal loan relief before adding, “I will work with your government to provide similar relief to private borrowers.”
The National Association of Federally Insured Credit Unions has taken no position on federal student loan waivers, but a spokesman said the group would oppose extending Biden’s plans to include private student loans.
Critics of the Democrats’ proposals point out that numerous other forms of incentives, including cash payments to individuals, would have a greater short-term impact than student debt relief. Taiano found that the monthly payment for a $ 10,000 loan with a term of 10 years and a 4% interest rate is only about $ 100.
Opponents of the plan also argue that debt relief would pose a so-called moral hazard that encourages Americans to borrow more on the assumption that future debts will also be canceled. “It’s a problem that people expect they won’t have to pay their loans,” said Adam Looney, an economist at the Brookings Institution.