2023-09-01 06:48:49
General description
After more than three years since the start of the Covid-19 pandemic, the US federal government is set to resume student loan payments, which were previously suspended as part of its response to the crisis. The national emergency declaration, which caused loan payments to be suspended and interest rates set at 0% for eligible federal student loans, ended May 11. Congress recently passed legislation to prevent the payment pause from continuing.
Resumption and announcement of payment
Starting September 1, interest on student loans will begin to accrue again, and borrowers will need to restart their loan payments in October. The Department of Education intends to inform borrowers before the repayment period begins. Loan servicers are expected to issue statements or notices at least 21 days before the first payments are due. This information was confirmed by the Attorney General of the District of Columbia.
Payment plan details
The SAVE Plan is an income-based repayment plan that applies to certain federal loans. This plan calculates payments based on the borrower’s discretionary income and family size. By adhering to this repayment plan, borrowers can prevent their loans from accruing unpaid interest, thereby controlling the growth of their debt.
Addressing Student Loan Debt
Jodi Letkiewicz, Associate Professor at York University, highlights the positive effects the SAVE Plan can have on student debt repayment. Ella letkiewicz refers to a principle in behavioral economics called the goal gradient hypothesis, which suggests that people tend to try harder as they get closer to their goals. Many students have expressed frustration with making large payments and still struggling to reduce their loan balances. The SAVE Plan aims to change this narrative by making the goal of being debt free more achievable and tangible as the loan balance decreases.
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Actions affected
According to analysts, several stocks are likely to suffer from the resumption of student loan payments. These include Affirm Holdings (AFRM), SoFi Technologies (SOFI), Discover Financial Services (DFS) and Navient (NAVI).
Pressure on digital lenders
Digital lenders serving low- and middle-income borrowers may face some pressure as student loan payments resume. Eugene Simuni, CEO of MoffettNathanson, specifically cites Affirm as an example. During a recent earnings conference call, Affirm’s management acknowledged that loan repayments would hinder its business in the upcoming fiscal year. Concern stems from consumers’ ability to repay their loans, as well as maintain their spending habits, which contribute to Affirm’s transaction volume.
Benefit for student lenders
By contrast, student lenders are expected to benefit from the resumption of payments and a normalizing credit environment. According to John Hecht, CEO of Jefferies, companies like SoFi, Discover and Navient are poised to perform well. Hecht explains that when borrowers are not required to repay their loans, they are less likely to engage in refinancing activities. Although the interest rate environment has changed recently, Hecht believes there is still room for refinancing activity. In addition, he expects the general demand for loans in the private markets to gradually recover.
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