Rhetoric Versus Reality: What's Happening In DC And What It Means For Student Lending

Debt forgiveness seems unlikely but opportunity for refinancing would grow after payment pause ends on Jan. 31, 2022.

 
 

Student loans have been headline fodder for many years. The political rhetoric has ramped up even more in the past two years, as the COVID-19 pandemic wreaked havoc on nearly every industry, with colleges and their students caught in the middle of it all.

While hot-button issues like free college and student loan debt forgiveness dominate policy discussions, what are the odds they will actually happen? Will the federal student loan payment pause really end after Jan. 31, 2022, as the Department of Education emphatically stated in August? And at the end of it all, is there still opportunity in private student lending to serve member needs?

During Credit Union Student Choice’s recent Empower U virtual conference, James Bergeron, president of the National Council of Higher Education Resources, and Scott Patterson, president of Student Choice, revisited the wild ride of the 2020-2021 academic year and offered their insight into what lies ahead for student lending and higher education legislation.

A Return to “Normal” for Students . . . and Lenders

As the pandemic hit in early 2020, college students and families were left scrambling, forced to make difficult decisions about returning to college in the fall, choosing a different school, or simply staying home. Colleges were forced into a new “virtual” reality, taking a huge financial hit in the process, with significantly fewer students enrolled and on campus.

In fact, enrollment in fall 2020 dropped by more than 600,000 students nationwide, with roughly half of that among the freshman class. A dramatic shift to remote learning also eliminated the need for room and board costs for many. As a result, private student loan borrowing needs dropped approximately 15%.

However, early indications for the 2021-22 academic year show a major bounce back, and potentially a return to a new “normal.” Preliminary data shows significant enrollment increases across the board as students eagerly headed back to campus. Not surprisingly, borrowing needs also increased. While loan levels may not have returned all the way to pre-pandemic levels (~$12-15 billion annually), it’s clear that loan volume from this past summer’s “peak lending season” has surged substantially year over year.

Despite some temporary, pandemic-related tuition freezes, the college costs are likely to rise significantly in the coming years, especially as colleges and universities face tight budgets and lasting financial impacts from the pandemic. With tuition and fees at private schools standing at nearly $44,000 per year on average it’s clear that credit unions have significant opportunity to serve members within the private student loan space.

A Coming Student Loan Refinance Boom?

Included in the CARES Act that passed in March 2020 was a pause on payments and interest on most federal student loans, which affected millions of American borrowers. Not surprisingly, student loan refinance activity slowed over the past 18 months as borrowers wisely held on to their no-payment, no-interest loans. These provisions were extended several times by former President Trump and President Biden. However, in early August the Department of Education announced a “final extension”, with payments and interest set to resume after Jan. 31, 2022.

Based on additional comments from the Biden administration, and the acts of federal student loan servicers who have begun notifying borrowers, it seems very likely that the payment pause will end after Jan. 31 as planned. In light of the payment resumption and historically low-rate environment, millions of student loan borrowers will be evaluating student loan refinance options in the coming months. Lenders in the student loan refinance space have already begun a major ramp-up of their marketing efforts, looking to cash in on what will likely be a refi boom.

Hundreds of credit unions offer a student loan refinance product. For some, this has become a key asset class over the past several years. By offering strong pricing and repayment terms, credit unions have a tremendous opportunity to be a force in this highly competitive market and help more borrowers take control of their student loan debt.

Widespread Student Loan Forgiveness Unlikely

The news throughout 2021 was filled with speculation on the prospect of student loan forgiveness. In fact, some progressive members of Congress, led by Sen. Elizabeth Warren (D-MA) and Sen. Charles Schumer (D-NY), have urged President Biden to use executive authority to cancel up to $50,000 of federal student loan debt per borrower. It remains unclear if the president has the legal authority to do so, and comments from both the president himself and Speaker Nancy Pelosi (D-CA) have cast serious doubt on the administration’s ability and desire to use this heavy-handed approach.

To date, the Biden administration has forgiven close to $10 billion in federal student loans through explicit limited authority previously granted by Congress to the executive branch. That amount is just a fraction of the outstanding $1.59 trillion in federal student loans. Efforts at forgiving debt thus far have been focused on targeting “economically distressed borrowers.”

With strong opposition from Republicans and several moderate Democrats, major question marks surrounding the president’s authority on this matter, and serious concerns about the benefits of mass forgiveness, it seems more and more unlikely that widespread student loan forgiveness will happen any time soon. This provides even further opportunity for private lenders in helping borrowers via student loan refinance while market interest rates remain low.

Free Community College Could Happen

More likely to occur than widespread debt forgiveness is some type of free community college, a favored concept going back to the Obama administration. On Sept. 9, the House Education and Labor Committee passed the Build Back Better Act. The legislation is based on the White House’s American Families Plan and it would create a free community college program. In order to receive funds, states must reduce their tuition and fees to $0 and maintain support for higher education. It also would reduce tuition for certain students at Historically Black Colleges and Universities and other minority-serving institutions.

The legislation is moving through budget reconciliation, which is an expedited process that allows legislation to pass the House and Senate by a simple majority vote. Democrats are using that process to try to enact a $3.5 trillion social spending package, but moderates in both chambers are trying to block and pare back. This process could alter, or even defeat, the free community college effort.

Regardless of exactly what happens, a free community college program would have very limited impact on private student lending. Private student loans are geared to students attending traditional four-year colleges and universities. And with many states already offering some level of free community college, the effect would be minimal for private student lenders.

The Bottom Line

The need for students and families to access fair-value student loan solutions is not going away any time soon. With enrollment and college costs rising, federal student loan payments restarting early in 2022, and potential government efforts coming into focus, it’s becoming increasingly clear that private student lending will continue to be an essential, and growing, opportunity for credit unions to serve this important member financing need.

 

 

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Oct. 18, 2021


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