The Supreme Court's decision to strike down the Biden administration's plan to forgive student debt means that tens of millions of borrowers whose payments are set to resume this fall owe substantially more than they otherwise would have.
The ruling could have at least two significant effects on the U.S. consumer lending industry. First, it could lead to higher delinquency rates on consumer loans, including credit cards, as some borrowers struggle to balance their renewed student debt obligations with other bills.
It could also slow consumer lending to a population roughly the size of California, as many borrowers are expected to see a dip in their credit scores after resuming payments on Sept. 1, when the forbearance period on debt repayment ends.
"It's going to have a chilling impact," said Silvio Tavares, president and CEO at VantageScore. "We're already seeing some of that from a lender's perspective."
The White House
There are also efforts under way, according to the White House, to create a yearlong "on-ramp repayment program" to help borrowers escape default, though it's unclear how that program will work.
"No matter what they do at this point, most likely it's on a significantly smaller scale," said Dominick Gabriele, an analyst at the research firm Oppenheimer who covers credit card companies.
With the first payments on federal student loans scheduled to be due in October, he added: "The average consumer may or may not have budgeted for this."
Even before the Supreme Court's decision, consumer lenders were already
Between 34% and 76% of borrowers may miss their first required federal student loan repayment, putting them at risk of a lower credit score, according to an
And while delinquency rates on credit cards and auto loans remain low by historical standards, they rose in the first quarter of 2023, according to the Federal Reserve Bank of New York's
Younger consumers, who hold a disproportionate share of student debt, have fallen behind on their car loan payments at a rate unseen since the late stages of the Great Recession, according to the New York Fed.
"We're going to expect to see that accelerated," Tavares said. "It could potentially have a ripple effect on other credit categories, but it's really difficult to predict which other categories this is going to impact."
The Supreme Court's ruling could lead to somewhat higher losses in the credit card industry, according to estimates by analysts at the investment firm Jefferies. By mid-2024, unsecured consumer credit net charge-off rates could reach between 0.85%-1.19%, up from an estimated 0.62%-0.98% under a scenario in which debt forgiveness was enacted, the Jefferies analysis found.
That may not be a surprise to credit card companies and other consumer lenders.
At different times this year, John Greene, the chief financial officer at Discover Financial Services, has noted that consumers could have a harder time making payments on other loans once the pandemic-era moratorium on student loan payments ends.
"We've done some modeling on that, and the models haven't been tested because we've never been through this situation before," Greene said during a June conference call.
He estimated that Discover's charge-offs could rise by between $200 million and $400 million after the moratorium ends. "That is not so significant that it's impacting the loss trajectory of the portfolio overall," he added.
In recent months, executives at other major credit card issuers, including Synchrony Financial, Capital One Financial, JPMorgan Chase and Bank of America, have also said that they are monitoring how student loan repayments could cause more borrowers to fall behind on other payments.
Brian Wenzel, the chief financial officer at Synchrony, said last month that the Stamford, Connecticut-based card issuer considered the forbearance period when making decisions about extending credit to borrowers with student debt, and had already set aside reserves to account for that risk.
"We have contemplated the fact that they were on a forbearance type plan when we did the underwriting," Wenzel said.
Still, the resumption of payments, and the lack of loan forgiveness, could be a shock for some borrowers.
"Whether or not those folks have budgeted that properly, after not paying for two or three years, is a different story," Gabriele said.
That means that consumer lenders need to be proactively communicating with customers about what the upcoming loan repayments mean for them, said Carrie Coker-Aivaliotis, senior director of credit risk assessment for LexisNexis Risk Solutions.
"Information is going to be key," Coker-Aivaliotis said, adding that consumers are often confused by changes in credit monitoring services and the difference between loan forbearance and forgiveness.
Lenders should take advantage of the buffer between now and the resumption of payments in the fall, as well as the Biden administration's proposed yearlong on-ramp plan, Coker-Aivaliotis added.
"The biggest lesson I think was from the Great Recession was the ability to make sure that consumers have the ability to contact their creditors," she said.
If the Federal Reserve further hikes interest rates, borrowers would be forced to pay more in variable-rate debt, which would add to the stress felt by consumers.
"If you're a chief risk officer or a lender, there's no movie you could watch to know how to navigate this environment," Tavares said. "Buckle your seat belts. It ain't over yet."
