Impact of Student Loan Repayment Resumption on Borrowers and Debt Market

Current State of Student Loan Repayments

Recent data reveals that 41% of student loan borrowers have missed at least one payment since the resumption of repayments in October. According to Morgan Stanley (NYSE:MS), these late-paying borrowers are likely to default on other financial obligations, particularly buy-now-pay-later and personal loans, increasing the risk within these sectors of the debt market.

Potential Ripple Effects

Morgan Stanley economists have highlighted the potential for increased delinquencies beyond student loans. They noted, “The resumption of payments could trigger further delinquencies, as student borrowers are more likely to default on other debts as well.” The economists identified buy-now-pay-later and personal loans as the areas with the most significant exposure.

Reasons for Missed Payments

The analysis discovered that the primary reason for missed payments was an inability to pay, though other factors such as reluctance or confusion were also cited. Specifically:

• 56% of respondents were unable to pay.
• 21% expressed an unwillingness to pay.
• 13% were unaware of the payment due date.
• 8% did not know the payment process.

Income Disparity in Payment Delinquency

Delinquency rates are notably higher among low-income borrowers. Specifically, 63% of borrowers earning less than $50,000 reported missing at least one payment, compared to only 25% of those earning $100,000 or more.

Future Projections and Economic Impact

While Morgan Stanley predicts a decrease in the overall student loan delinquency rate from its current 41% as more borrowers resume payments, it is expected to remain higher than the pre-pandemic level of 16%. The resumption of payments is anticipated to dampen consumer spending. Borrowers who miss payments tend to have lower savings and weaker spending intentions compared to those who consistently make payments. On average, these borrowers have savings covering only 2.1-2.6 months of expenses, whereas all student loan holders and the general survey population average 3.9 and 5.1 months, respectively.

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