U.S. banks can add the revival of student loan payments to the list of obstacles to deposit growth.
With more than 40 million Americans scheduled to resume making student loan payments this month, some consumers are tapping funds that otherwise would stay in their checking and savings accounts. Student loan payments for all Americans with such debt will total about $18 billion per month, according to a Jefferies report from this summer.
It is an unwelcome dynamic for an industry that has already seen consumer deposits flatline amid heightened competition among financial institutions. Thanks to higher interest rates, banks are also paying more for deposits — a contrast with the cheap funding that financial institutions enjoyed after the Federal Reserve cut interest rates sharply in 2020.
To prepare for the expected impact of the end of the pause on federal student loan payments, banks are modeling worst-case scenarios and bracing for a continued decline in deposits. Some are partnering with third-party vendors that promise to help bank customers with student debt reduce their monthly payments. Lower payments for consumers mean fewer deposits leaving the bank each month to pay down student debt.
"There are certainly areas of deposit pressure, and student loan payments are one more layer of pressure," said Chris Marinac, director of research at Janney Montgomery Scott.
Other factors eating away at both consumer and commercial deposits include the rising cost of goods and services, which is leading banks' customers to spend funds that would otherwise be deposited at the bank, as well as fierce competition from other financial institutions.
Deposits at U.S. commercial banks totaled $17.3 billion in late September, down from $17.9 billion a year ago. Bank deposits surpassed $18 billion for the first time in 2022, after consumers spent more than two years putting stimulus funds and other pandemic-era savings into their bank accounts.
"To limit deposit declines, banks have had to increase the rates they pay in the face of rising yields on products such as money market funds and Treasuries, as well as competition from other banks," S&P analysts wrote in a report last week.
At the onset of the COVID-19 pandemic in 2020, the federal government paused student loan payments and lowered interest rates for borrowers to 0%. The moratorium was extended several times before the Biden administration announced earlier this year that payments would once again be due this fall.
As consumers adjust to resuming payments on their student loans, the relationship between household income and deposits may become more relevant for banks.
Lower-income households typically have a larger share of their assets in the form of bank deposits than their higher-income counterparts, according to research published Thursday by the Federal Reserve Bank of New York. Because households with lower incomes are more likely to have student loan debt, banks could see a particularly robust decline in deposits among those customers.
Households with the lowest incomes kept about 66% of their money in checking or savings accounts and the remaining 34% spread across other asset categories, according to the New York Fed data. At the same time, households in the highest income tier kept 17% of their money in deposit accounts, with the other 83% in stocks, bonds and investment accounts.
Several large U.S. banks have partnered with Payitoff, a startup that helps financial institutions automate debt management for consumer loans. Payitoff will help banks take advantage of existing relief programs for student loan borrowers, said Bobby Matson, the company's CEO and founder, which can result in more of their customers' funds remaining in deposit accounts.
"[Banks] should be really thinking about how to minimize the payments so they can reduce how many deposits are just getting allocated to these accounts," Matson said.
Payitoff saves the average borrower with student loan debt about $240 per month, Matson said.
A clearer picture of deposit trend lines will come into view next week, when U.S. banks begin reporting their third-quarter results. Analysts expect the data to show that industry-wide deposits remained stable in the third quarter.
At Wells Fargo, commercial deposits are expected to stay at the same level, but deposits from consumers are set to decline through the end of the year, Chief Financial Officer Michael Santomassimo said at an industry conference late last month.
"The primary driver there is really spending that's driving those deposits down," Santomassimo said.
