Are strategies in place to protect student loan performance?
Impacts to After-Tax Income by Federal Student Loan Payments
As reported by PYMTS on June 6, 2023, Millennials with student loans are projected to lose 6.5% of spending power when Federal Student Loan payments resume in October 2023. This is based on $33,173 average total student loan debt, $5,591 (~$80,743 annual gross income) average after-tax monthly income, and $365 average student loan monthly payments.
The breakout of private and federal loans was not discussed, however, the average federal student loan debt for all students, undergraduate and graduate education, was reported by the Federal Reserve at similar levels.
The point is that Millennial (27 to 42 years old) borrowers of private student loans are projected to lose on average 6.5% of after-tax income. Meanwhile, Generation Z (up to 26 years old) are projected to lose on average 4.3% of after-tax income. An important point is that risk managers are concerned with the tail risks of a distribution of debt and income levels, not the average.
Timing of Federal Student Loan Payments
After 3 years of the freeze on direct Federal Student Loan Payments, the website of the Department of Education states that payments will resume in October. Certainly chaos and confusion will ensue in the convening months. This is the climate that operations will need to operate under. Without a dynamic risk playbook, the stress levels will only increase.
Risks
The risk to private student loan lenders and other lenders is rising delinquencies in Q4 and into 2024. Lower disposable income reduces a borrower’s ability to meet all debt obligations. A lose of disposable income will be material especially for borrowers that are barely meeting their current debt obligations.
It makes sense that the following will play out in private student loan portfolios:
- Rising forbearance requests to servicers in Q4 2023
- Rising early-stage delinquencies in Q4 2023
- Rising late-stage delinquencies in Q1 2024
- Rising defaults in Q2-Q4 2024
Consulting by Einstein Higher Edu Solutions
Getting ahead of these risks requires data analytics to risk segment the portfolio. The next step is to formulate in-house and third-party strategies tailored to each risk segment. Finally, iterative reactive strategies are needed to manage on-going risks. A playbook is needed.
Einstein Higher Education Services can provide much needed expertise, experience, and data analytic capabilities to manage the risks to your private student loan portfolio. A small allocation of weekly hours will minimize negative impacts to your private student loan portfolio and allow you to sleep better at night.
This is an extraordinary event that requires an additional perspective to bolster your leadership team. The benefits of maintaining performance of your private student loan portfolio does not need to be listed.
I look forward to helping you manage this unprecedented risk.
Aaron Pisacane
Founder, Einstein Higher Edu Solutions
Affiliate sponsor of the Education Finance Council.
(917) 968-6483