TransUnion cautious about potential ‘payment shock’ when student loan payments restart

A portion of the contract holders in your outstanding auto finance portfolio might be facing an additional major payment obligation next month when forbearance for federal student loans expires.

And TransUnion reported 36% of consumers already holding student loan debt took on auto financing commitments since the beginning of the pandemic.

It’s all percolating into what experts are calling “payment shock.”

TransUnion determined the average consumer with a student loan carries about $35,000 in debt.

A new TransUnion study, “Implications of the End of Pandemic-Era Student Loan Forbearance,” found that, as student loan payments resume in September, many borrowers may find themselves facing the challenge of having to manage these payments for the first time amidst a more expensive monthly debt portfolio.

TransUnion pointed out that the U.S. Department of Education has directed that student loan delinquencies not be reported to the credit bureaus for 12 months until Sept. 30, 2024, helping to protect consumers’ credit as they manage these new payments.

The TransUnion study looked at the anticipated impacts of these restarted payments on consumers’ wallets.

TransUnion’s study found that as of May 31, 40.6 million consumers possessed student loans, totaling $1.6 trillion in balances.

From this group, researchers discovered approximately 26.8 million consumers with federal student loan debt totaling $1.1 trillion are expected to be faced with a resumption of payments for the first time since the beginning of pandemic-related payment moratorium, or for the first time ever if they were not in repayment prior to the moratorium.

TransUnion pointed out that many students with private student loans did not have a payment holiday.

During the Pandemic, Consumers With Student Loans Added New Debt

Source: TransUnion US consumer credit database; data is as of May 31, 2023;  trade defined as opened during the pandemic if opened on or after March 31, 2020. 

While current Department of Education plans for student loan forgiveness could alleviate payment requirements for some borrowers once finalized, TransUnion said most of this group will be facing monthly student loan payments for the first time in years.

These borrowers will experience a “payment shock” as they attempt to recalibrate their monthly budgets to accommodate this new payment, according to TransUnion.

Liz Pagel, senior vice president and consumer lending business leader at TransUnion said payment amounts will vary, but many of these consumers have taken on additional debt since the last time they had to pay their student loans.

Pagel explained why it’s important for both finance companies and consumers to be prepared for this new payment shock.

“These additional credit products mean additional monthly payments, the accumulation of which may pose added challenges for households attempting to reintegrate student loan payments into their monthly budget,” Pagel said.

While the Department of Education has offered a 12-month runway before student loan delinquencies will have an impact on consumer credit files, TransUnion said interest will begin to accrue immediately so it is in the best interest of consumers to resume payments right away.

TransUnion’s study analyzed consumers who will experience a “payment shock” across a range of dimensions. These areas included generational breakdowns and credit risk ranges to determine how large their expected student loan payments will be once they are restarted.

The study showed that about 50% of consumers who will experience a “payment shock” are expected to have a payment of more than $200 a month and about one in five will see payments of more than $500.

The study also showed that these figures did not vary significantly when viewed across credit risk tiers.

For instance, TransUnion noticed that between 18% and 20% of borrowers had payments of more than $500 over each risk tier.

However, researchers found there was some divergence when looking at the data across generations, as the Silent Generation, Baby Boomers and Gen Xers were more likely to have payments of $500 or more, while Gen Z borrowers were significantly less likely, with only 5% expected to have payments of more than $500.