Dealers May Feel Impact If Student Loan Payments Boost Delinquencies

The end of federal student loan forbearance has some analysts worrying about whether the return of monthly student loan payments might drive many borrowers into auto loan delinquency. Yet researchers for the New York Federal Reserve say they don’t expect student loans to have much effect, except maybe for households with the most stretched-thin budgets.

That’s positive news for auto lenders and dealers because the auto retail industry is already dealing with an affordability problem because of high interest rates, high sticker prices, high monthly payments and relatively low manufacturer incentives.

As of the end of the second quarter, the New York Fed says auto loan accounts in serious delinquency, defined as 90-plus days past due, accounted for 3.8% of the total amount, about even with a year ago.

Federal student loan forbearance began after the onset of the COVID-19 pandemic in March 2020 and officially ended Sept. 1, 2023. Student loan monthly payments have resumed in October, the New York Fed reports.

The New York Fed added questions aimed at student loan borrowers to the Household Spending portion of its August 2023 Survey of Consumer Expectations.

As Wards has reported, rising interest rates and monthly payments result in auto loan delinquencies reaching to pre-pandemic levels. The New York Fed is watching whether those delinquencies stabilize or whether factors such as the return of student loan payments drive them higher.

So far, on average, that answer is a qualified no.

“The findings suggest that the payment resumption will have a relatively small overall effect on consumption, on the order of a 0.1 percentage point reduction in aggregate spending from August levels,” the New York Fed reports.

Other survey findings say student loan borrowers expect to reduce their monthly spending by an average of only about $56.

But not everyone is convinced.

"In the short term, it may get worse," Barry Coleman, vice president of program management and education at the National Foundation for Credit Counseling tells Yahoo Finance. "The reason is many consumers have simply put student loan repayment on the back burner and have not proactively considered how they will continue making student loan payments in the context of higher inflation."

On another question, on average, student loan borrowers say the likelihood they might miss a payment was 22.6%. The response was about half that, or 11.8%, for student loan borrowers who estimate their likelihood of missing a payment on a non-student-loan obligation due to the return of student loan payments.

Respondents who report an above-average likelihood of missing a payment included females and non-whites, respondents with household income below $60,000, respondents without a college degree and respondents who never made a payment before the end of the pause.

The New York Fed speculates that many student loan borrowers already reduced their spending as soon as they heard payments would resume.

“One reason for these relatively small effects is that potentially many borrowers already made changes to their savings and consumption decisions after learning that payments would certainly resume in October,” the New York Fed says.