The return of student loan payments could lead to borrowers not paying back debt as their expenses mount, according to Bank of America.
While consumers have been paying their debt back and delinquencies are “subdued for now,” they’re rising, the bank wrote in a note this week.
A rising number of people have been more than 30 days late on their auto loans and credit-card debt, BofA
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noted, and the share of people who are seriously delinquent on loans, or more than 90 days late on their debt, has risen above pre-pandemic levels.
If student loan payments resume in full, “we estimate that serious delinquencies could rise by about 67% over time,” BofA stated, “with risks of knock-on effects to other forms of household debt as well.”
The Consumer Financial Protection Bureau estimated that more than 1 in 13 student loan debtors are currently behind on their other payment obligations.
For borrowers, not paying back student loans would have serious implications for their overall finances: Missing a student loan payment could result in a big negative impact on their credit score. For a borrower who has a credit score between 350 to 850 — which is a large range — missing a student loan payment could cause their score to drop by 49 to 82 points on average, VantageScore estimated.
Student-loan payments are set to resume on October 1, and 26.6 million borrowers with federal student-loan debt will have to start paying back their loans again, with an average monthly payment of roughly $200 to $300, according to a separate note by Morgan Stanley
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While some student-loan borrowers have already begun making adjustments to their finances to accommodate the return of student-loan payments, BofA doesn’t seem as optimistic about the masses.
BofA said that its strategists and analysts worry that a full resumption of payments will lead to consumers being late in paying back not just student loans but also other types of debt.
“In dollar terms, such an increase would amount to $167bn of new seriously delinquent balances, which would raise total serious delinquencies across all categories of household debt by around 67% relative to their 1Q 2023 level ($249bn),” the report stated.
Morgan Stanley expects consumers to pull back on spending when the pandemic-era moratorium on student-loan payments ends, because they’ll have less room in their budgets.
“We expect to see a hit to disposable income and a moderate pullback in discretionary spending in 4Q23,” Morgan Stanley wrote.
See also: The resumption of student-loan payments: Missing even one installment can seriously damage your credit score
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