Student Loan Debt Relief: What It Could Mean for Credit Unions
On August 24, 2022, the White House announced a three-part plan to reduce federal student loan debt, and in some cases, forgive loans completely. Measures also included extending the existing freeze on payments and interest through the end of 2022. How will these new measures affect credit unions and other financial institutions? Let’s take a broad look at student loan relief & your credit union.
New Opportunities
Those who stand to benefit from the student loan reduction/forgiveness plan could have a lot more buying power. Credit scores overall are expected to moderately improve, and those who were hesitant to apply for auto and home loans in the past will now be in a better position to do so. New credit opportunities will suddenly become available, and credit unions should be prepared for the influx. That’s the nutshell. However, it gets more complex when you consider how individual financial cases differ from each other.
The Facts
The student debt relief package will benefit borrowers of lower-to-middle income status, representing two-thirds to twice the median household income, nationwide (stopping below the top 5% of incomes). The White House statements explain that this plan is intended to help those who need it most.
The debt reduction strategy will initially involve extending the pause on federal student loan repayment through the end of 2022. Further, the Department of Education (DoE) promises to cancel student debt up to $10,000 (and $20,000 for those who borrowed alongside Pell Grants) for those with individual incomes of up to $125,000 and household incomes up to $250,000.
Also included is an income-driven repayment system, whereby monthly payments for undergraduate loans are capped at 5% of discretionary income, rather than the previous 10% for an IDR option. Some loans are to be forgiven altogether if the borrower is employed in the military, government, or nonprofit sectors under the Public Service Loan Forgiveness (PSLF) program. In addition, debtors with loan balances under $12,000 can see them disappear altogether after 10 years of payments (rather than 20 years, as with the previous forgiveness program).
How Will Credit Unions Be Affected?
With these new plans in place, credit unions should expect some of their members to find themselves in new financial positions. 20 million people will be completely relieved of student debt for the first time in their adult lives, and this could mean that they will be looking at new financial opportunities they had not considered before. They will be able to better manage other loan payments and take out new loans they have previously turned away from. They may have more flexibility in their finances due to paying down other debts, such as credit card debt (which is a problem in itself). Even consumers who still have student loan debt will benefit from lower monthly obligations and reduced debt-to-income ratio, resulting in improved creditworthiness.
Consumer prosperity means credit union liquidity. The more disposable cash, the higher the deposit count for financial institutions. It’s important to identify the percentage of your members who will qualify for this debt relief so your credit union will know how to prepare for the demand (if any). Younger members who are eager to be first-time homebuyers may be able to start this phase of their lives sooner than predicted. Post-graduates will be shopping for new vehicles and personal loans for travel opportunities. Older recipients of the debt relief program will perhaps be looking to upgrade to new, larger homes, and plump up retirement plans.
Prepare for Some Changes
A recent article by CU Times mentions that data analytics services may be critical. A credit risk and marketing strategy expert is quoted as saying, “…it would behoove credit unions to figure out who the debt forgiveness benefits, by how much and predict what those members might be inclined to do next.” He goes on to say, “…debt forgiveness will provide an opportunity to credit unions that are prepared, and for those credit unions that have financial inclusion strategies, it will be a test of their ability to execute on them.”
Credit unions may have to adjust standard policies to accommodate members who have not qualified for certain loans or programs in the past. This is undoubtedly unchartered territory, and financial institutions stand to gain (or lose) loyalty and trust by the way they handle this new demographic and the possibilities they bring.
More people may also be looking to consolidate or refinance existing student loans to lower interest rates even more. As everyone in the industry is aware, credit unions are known for their competitive rates, not-for-profit model, and friendly customer service. It makes an attractive option for banking, and it’s an ideal time for credit unions to shine. Make sure you are prepared with the best forms and disclosures on the market! Contact Oak Tree Business Systems to see how to save your credit union time and money by using customized Membership, Consumer, and Home Equity Lending documents from Oak Tree.
