Student loan repayment restart — what it means for you

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Hi, welcome to Mobile Money by Moomoo I'm your host, Justin Zacks, vice President of Strategy at Moomoo Technologies.

I've spent my whole career in and around financial markets. It's something I have a real passion for. This is a show that helps investors gain a better understanding of markets and their money. Low to middle income families save less than $500 total before their children finished high school, their children were four times more likely to graduate from college than those with no college savings account at all.

Not everyone will have enough savings grants, scholarships or parental assistance to fully fund their higher education. A little less than half of students will fund their post-secondary education with loans. While the level of student loans to overall costs has been on the decline for a long time, payments can stretch for years and affect many borrowers' life decisions. Those choices are about to get a lot tougher.

After a more than three year hiatus, many borrowers resume payments on their student loans on October 1st. After interest started accruing on these loans. September 1st, with a new plan from the White House that will ease borrowers into repayment, the actual overall effect on the economy could be minimal. The psychological factor, as well as other factors, could have a large impact on any possible economic slowdown.

Many borrowers will be faced with some tough life choices and may need to make some significant changes to their financial budgets. Today, we'll explore several of the popular misconceptions around the restart of these payments, as well as what some of the economic effects could be and what types of adjustments borrowers can make to their budgets. But first, it's important to gain a better understanding of the current student debt situation and how we got here in the first place.

There are over 44 million people with student loans, $1.7 trillion in overall loans. That includes both federal and private loans, although federal loans make up the bulk over 90% of all student debt. And student debt is growing faster than other types of household debt. And it now only trails mortgages in the categories of overall consumer debt. The average payment is $400.

So that's actually 10% of the average Americans after tax earnings. Imagine taking a 10% pay cut in our current inflationary environment can be very difficult. I want to talk with you a little bit about some of the misconceptions around these student loans. All these numbers are only averages and they can really vary wildly based upon the type of the green individual has their age, their race, and a host of other factors.

And probably the first misconception I'd like to talk with you about is that the idea that Gen Z holds the most student debt and that's not necessarily the case. 59% of millennials have student debt, 34% of Gen Xers, and 29% of baby boomers. It's not just the Gen Z problem. If you look at people over the age of 62, they have a $111 billion of aggregate student debt.

And the people under 24 only have $99 billion in overall student debt. So that just goes to show you that this problem is not just a problem of the young there. There's student debt across the whole thing. 23% of the federal loan balance is held by borrowers over 50 years. And if you want to get into that, you really have to think about the type of degree people are getting about.

You know, half of the debt is held by undergraduates. And that's where I think most people think about college. They don't think about the graduate degrees. Graduate degrees can be a lot more expensive than the undergraduate degrees and the aid outside of the loans, the grants, the scholarships, the parental support is just not there at the graduate level as it would be in the level of undergraduate.

So the average debt is about $38,000 and the median is about $20,000. But the professional degree holders and those graduate schools, the law schools, the medical schools, they have a median debt of $168,000. They just it's an astronomical number compared to the undergraduates. But what you got to think is someone that is going to law school, going to medical school, as long as they graduate and are able to practice in their field, they're going to make a lot of money.

So they're going to have the financial capability to pay those loans back. And this is really where it becomes troubling for a lot of people, a lot of people that are getting their education. They're not finishing what they're doing and they're not getting their degree. So they're not transferring an over to a job where they're making more money that they can pay that money off.

So to give you an example of, you know, these graduates, roughly 45% of the outstanding federal education loan that was held by the one in ten borrowers with balances over $80,000. There's also a large racial disparity in student loans, and it's not necessarily about the amount borrowed, but the percentage you're able to pay back after you graduate or after you started taking the loans out.

Black borrowers owed the most as a percentage, borrowed for years after graduating, compared to Asian borrowers who owed the least. So black borrowers are struggling to pay some of these loans back several years afterwards, where Asian borrowers are more likely to be able to pay that money back. Another misconception is that things will simply go back to the way they were pre freeze with regards to student debt.

And so with that, it's really important to understand kind of a timeline of how this all happened. And student loan repayments stopped because of the pandemic. It was instituted, the freeze was instituted by then President Trump and it was extended by President Biden when he took office. But even before the pandemic, borrowers were struggling with their student debt at the time, 17% of those with educational debt were behind on their payments.

That was 2019. 40% of borrowers not currently enrolled in school with less than an associate degree were behind. So it really goes to show you that the people that are dropping out or not finishing are the ones that are struggling the most. While 8% were behind that had bachelor's degrees and only 6% of those with graduate degrees were behind.

A real paradox, since they have the highest balances, as I mentioned earlier, but they also will have the highest incomes on average and have a ability to repay that debt. So for the past three and a half years, borrowers did not have to repay their student debt. And Biden started working on a plan to forgive student debt. Eventually, that plan was struck down by the U.S. Supreme Court in June.

So here we're in this fall, we're back to September 1st. Interest started accruing on the student loan debt, and payments resumed on October 1st. And in the interim, Biden came up with a new plan called Savings on a Valuable Education Save the Save Plan. And payments are based on income and family size and which is called an income driven repayment plan or an IDR.

There's forgiveness of loans after 12 or more years of repayment. And very importantly, there's no effect on the credit rating of borrowers for one year for nonpayment. So starting with October 1st until October 1st of 2024, you're not going to have a ding on your credit rating if you do not pay on time or pay at all. But even if you don't pay, the interest will keep accruing whether or not you're making those payments.

There's a ton of confusion around the restart of these payments. 46% of federal student loan borrowers don't know how much student debt they have. 57% don't know who their loan servicer is. Nearly a third aren't sure what their interest rates will be when the forbearance ends. 27% aren't sure how to make payments. So all of this is creating a mass amount of confusion.

So it is good that you do have this one year grace period that Biden has put in. But logistically, it's it becomes very difficult. The servicers have laid off many of the employees. 70% of borrowers don't know payments are even set to resume. And in addition, it's not really in President Biden's interest to make it very clear and easy.

He doesn't want this necessarily to be successful because he wants these loans eventually to be forgiven. But what I will tell you is if you do have any questions, you should go to the U.S. government federal student loan portal, as well as the servicers portal. You can find the servicers portal on the federal student loan portal to find everything that you need to know, and they should be able to guide you from there.

While borrowers will have that one year grace period at the end of that period, assuming there's no new legislation or no new programs, if you don't pay in 90 days, it will be marked delinquent. And after 270 days, the loan will be in default and assets can be seized by the U.S. government and you can be denied to government programs like Social Security.

Now, if that if it gets to that level. Another issue that we're having now that we didn't have when student debt was being repaid three and a half years ago is inflation. And that's really eaten into a lot of people's budgets. And now they've used that extra money they had from not paying student loans to pay for other things that just now cost a lot more.

And we could see it food, housing, gasoline, all these types of things are up tremendously over the last three and a half years. And so you're going to see a lot of borrowers try to make room to repay these student loans and that and that can cut into the retirement savings of many borrowers or lower or hold their contributions or retirement plans, such as for one case and IRAs.

They're more likely to take out loans against those. For one case, it could in in your ability to purchase a home, the ability to make a payment, we could see the interest rates have gone up tremendously. So those payments are higher, housing prices are higher. So it's kind of a triple whammy. So you're now have less money because you're paying student loans back, your payments higher because the interest rates are higher and your payment is going to be higher because you have to borrow more money because housing prices are higher.

So all these things are going to make it really difficult for particularly new purchasers to get in on the housing ladder and an even saving for a down payment can be difficult now that the student loan repayment has started because you're just not going to be able to save as much if you're repaying these loans. This is where you really do see a large effect on on younger people.

And I'll give you an example of how tough economic times are when it comes to a home purchase. Whereas 45% of household heads age 24 to 32 in 2005 own their own home, only 36% did in 2014 a market, 9% drop. And you can see this the overall homeownership rate in the country is about 66, 67%. And studies have shown that the higher student loan debt levels earlier in your life can lead to lower credit scores later in your life, impacting your ability to qualify for a mortgage.

It also really affects your life choices. And you could delay when you're going to get married, when you're going to have kids. So it's going to affect the society as a whole when they're having less children later in life, they're delaying their marriages, which can be beneficial in so many different ways. So it has real societal impacts as well as economic impacts.

A third misconception is, well, this doesn't affect me. I don't have a student loan or I'm not I'm not wrapped up with this. It's not going to affect my broader life. And that's where a lot of people get it wrong, because this affects everything in It's going to affect the wider economy and it'll have a lot of sector and stock specific effects.

And it's really all about the consumer. And you look at these consumer spending data that we've seen recently, really robust retail sales. The economy has been really chugging along, but we have seen some kinks in the armor coming into the fall. A lot of the credit card data has shown us that people have cut back spending. We recently saw some of these bank earnings come out and you've definitely saw that in some of their earnings, in some of their commentary from their executives.

One way to look at this is is to look at the Bureau of Labor Statistics from before, during and after the Great Recession, to see how consumer behavior actually changed. And so the idea is, you know, during times, if we are going to come into a recession possibly later this year, next year at some time, you know how will consumers change their habits?

And looking at the data, it's important to differentiate between cyclical changes. Are those due to the economic cycle recessions and booms and secular changes, such as the declining importance of food and clothing and budgets as wealth increases over time or the declining importance of landline phone service technology shifts towards mobile phone usage. In tougher economic times, consumers tend to eat out less and they're going to eat at cheaper places than they than they normally would.

So you can think about this when you think about your stock strategy in where you may want to buy or sell stocks and how those companies may perform, consumers also would likely limit their new car expenditures by buying used cars relative to new cars. This is all from data that we saw during the great, during, before and after the Great Recession.

Much of that decline is from the vehicles and consumers really cut back overall on these discretionary items. But other items, not just cars. Furniture saw a drop of about 25% in their relative importance. Appliances also fell. The other area that you think might have fallen during that time was travel. And it was actually not true. The relative importance for hotels and motels actually rose modestly from the recession to the recovery period.

And the airline fare index doesn't fit the expected pattern either. They actually rose in the recession and falling since. So it's interesting to look at those ideas. And that travel is not one of those things that people will cut back. And people like to travel and some people have to travel for business. And so these things didn't take as big a hit as you might think they did during the recession.

And certainly our younger cohorts in Gen Z and millennials are begging to travel and it's not something they're willing to give up any time soon. Speaking of the great financial crisis, you know, how big could this problem actually get from our current student loan debt? And I talked a little bit about it before. Student loan debt is about 1.7 trillion in aggregate.

To give you an idea of other types of consumer debt, autos are 1.5 trillion. Credit card debt is about 1.2 trillion. But the behemoth right now is mortgage debt in terms of consumer debt, and that's a $12 trillion approximately. So it gives you an idea that we're nowhere near our potential problem that we had during the Great financial crisis that was really based upon mortgages and not based upon student loan debt.

Student loan debt doesn't exist in a vacuum. It can affect other types of debt, and it can really run into a vicious cycle. The credit scores can be lowered on a personal basis, but this affects all borrowers. So if you have lower credit scores, there is less borrowing, there's higher interest rates for those borrowers. It can deflate markets and possibly slow the economy.

Those are some of the knock on effects. But if you want to know what the real direct effect will be, it might not be as much as you would think, even without the SAVE program, which obviously could cut this back tremendously. There's about $70 billion of expense from these student loans, and that compares to an annual consumer spending of $19 trillion as of April of this year.

It could be a potential 0.4% drag on consumer spending, according to economists. But that's relatively a small amount. And that obviously does not include the SAVE program. The SAVE program will cut that direct effect back tremendously. We're still seeing a very strong consumer at this point. Like I said, retail sales have have been above analysts expectations for the last few months and could continue to be on if this trend continues.

What we might see is kind of this delayed reaction once that one year ramp period is over and it could cause a spending cliff, that could be an issue to watch next October. While it might not have a huge effect on the economy overall, many individual borrowers and specific sectors and companies are going to be impacted disproportionately. And we talked a little bit about that before.

The final misconception is that a lot of people think there's nothing they can do about their situation, and that's not necessarily the case. As we mentioned before, it could be a close to a 10% haircut, post-tax on cash flow for many borrowers. And this certainly is going to have a big psychological impact. The idea that you have this bill coming due.

So when you have an obligation and a bill coming due, you're going to cut back your spending perhaps more than this actual bill would be. There's the whole idea of like, I have this bill coming. I got to, you know, batten down the hatches, cut back on my spending. And that could obviously influence the psychology aspect of this whole idea, the idea that you're going to think you're poorer than you actually are and you're cut back in your spending more than you actually need or actually have been spending in the past.

Long term, this can affect consumer confidence. And even if it's not that big of a hit, I mean, even if you were making more money than the average American, a lot of borrowers may find that after a three and a half year hiatus, inflation ate their payment. When it comes to their budgeting. And we've talked a little bit about that earlier.

We looked at the BLS data and what that might look like for the broad economy in a lot of sectors. But what does it really look like on an individual basis? You know, where do you find these cuts? And if you look in the past where people made some cuts and obviously it's going to differ for each individual electricity, do it yourself repairs.

People are not going to hire out as much. Maybe they'll have a roommate or get a roommate. Want to move in with a roommate, save some money, are shopping for and foregoing insurance. So a lot of people will not get health care because they'll find it's too expensive. They might cook instead of eating out, they might look into debt consolidation.

A lot of people have very high interest on their credit card payments. This is a great time to start thinking about, well, how do I take that debt and get it to a more manageable interest rate now that I have a second payment on the student loan debt? Speaking of second, you could take a second job. Many actually already have done this and the labor market still quite tight.

So it's kind of hard to actually find those jobs at this point. A lot of people may ask, you know, should you stop paying your student loan? And I want to reiterate, interest will continue to accrue even if you stop, even though there is this one year grace period, you're going to be digging yourself a bigger type of hole.

So please let me know in the comments whether you're planning to skip your repayment and why. It is a personal choice that everyone's going to have to make on their own, but it can affect your credit rating once this grace period is over. If you're not able to start repaying, a lot of people are going to have a lot of tough choices between the types of payments they can make.

They have an auto loan. They have they have a mortgage, they have a student loan. So they're going to have to make these choices and they're going to be very hard, hard choices for a lot of people. And lastly, I would say a lot of people may be thinking, well, I'm going to count on Biden. You know, I'm not going to pay and he's going to make the student debt go away.

Well, you can't necessarily count on which way the political winds will blow. And Biden might not be able to make that happen. If you are struggling, it's important to think about how to get back on track. And the first thing to do is create a budget. If you don't have one, that's probably the most important thing you can do is really to understand how your money is coming in and how it's going out and really prioritize those spending habits to make a balanced budget and prioritize your debts as well.

And we talked about that before. It's, you know, if you can't make all of your payments, you need to make the payments that are the most important to you. You also need to prioritize your lifestyle. Choices are some of the best things in life are free, and it's getting to doing some of those things. And a lot of people during the pandemic reconnected with nature.

They reconnected with the things that matter most, and a lot of those things don't cost that much money. And you did see savings really ramp up during that period. So it's interesting to look at and think about what your lifestyle choices are, how much things cost that you do, and can you kind of substitute something that's free or cost less.

To wrap it up For borrowers, student debt repayment has return, whether they like it or not. Educating yourself about the repayment process and coming up with a realistic personal budget can go a long way to relieving some of the stress associated with the changes. Investors need to be aware that while there are government support programs and a one year on ramp at the start may affect consumer confidence in spending in their overall investments in the economic landscape.

Thank you very much for tuning in today. Hope you listen again. The opinions expressed are those of the host and any guest speaker and not necessarily those of Moomoo Technologies Inc or its affiliates. The podcast is provided for informational educational purposes only and is not a recommendation or endorsement of any particular investment or investment strategy that may be mentioned or covered in the podcast.

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