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The October Cliff and What it Means for Student Lending

Image via CNBC

With student loan forbearance expected to expire on September 30, 2021, 33 million Americans will have to face renewed monthly payment obligations for their student loan debt after 18 months of no mandatory payments and zero interest accrual. While this may represent a challenge for certain sectors of the economy, we predict very active education refinance activity in Q4 ’21 once the payments do resume.

The combination of low interest rates and the potential of lowering total monthly payments through consolidation will drive borrowers to consolidation and refinance. Private student lenders should make sure their education refinance offerings are well positioned to help their customers during this period.
Nearly 41 million federal student loan borrowers have had interest suspended on their loans since March 13, 2021 beginning with the CARES Act and continued under Trump’s executive action over the summer. Roughly 33 million of those borrowers have had their payments paused, and the U.S. Department of Education has stopped seeking to collect from the 8 million other borrowers who were in default.

Currently, there is still a possibility that Biden will extend loan forbearance beyond the current September 30, 2021 date. When asked whether federal student loan payments and interest accrual will restart October 1, 2021 or be paused beyond that date, the new Secretary of Education, Miguel Cardona responded: “We’re looking at it. Obviously, we are going to take lead from what the data is telling us and where we are as a country with regards to the recovery of the pandemic. It’s not out of the question, but at this point, it’s September 30.”

Senator Elizabeth Warren (D-MA) continues to push for student loan forgiveness as a remedy to this potentially disastrous scenario. She contends that if the payment pause is lifted without cancellation in October, “we are facing a student loan time bomb that when it explodes could throw millions of families over a financial cliff,” Warren said during a recent town hall hosted by the American Federation of Teachers.
“The average borrower is going to have to start repaying nearly $400 a month to the government, instead of spending that money in our economy,” she added. “Student borrowers are at risk of being thrown into an extraordinary financial hardship. When the pause on student loan payments and interest ends on September 30, people aren’t going to know how much they owe. They’re going to miss deadlines suddenly. They’re going to be delinquent. They’re going to owe penalties on this.”

A Pew survey earlier this fall found that 58 percent of borrowers who said their payments had been paused during the pandemic reported that they would face difficulty if they were required to resume making those payments in the next month. At Anovaa, we feel confident that this indicates the student loan repaying public will attempt to manage their newly increased monthly obligation by seeking private loan consolidation and refinance options. Many borrowers could benefit from refinancing their existing loans to take advantage of continued low interest rates and obtain a more manageable monthly payment.

We’re continuing to help our clients assess this opportunity and ensure they have best-in-class education refinance products in their portfolio. We provide a consultative approach to product innovation and use our highly configurable platform to help banks, credit unions and other lenders meet the expectations of their current members and potential new customers. We’ll continue to monitor the administration’s position on loan forbearance but if improving your student loan products is on your organization’s roadmap, schedule a meeting with our team to learn more.