The Grace Period is Over. What does that Mean for Student Loan Borrowers?
Student loan payments on hold as a result of COVID-19 were due to resume in September 2023, and while borrowers who have not resumed payments are seeing interest accrue on those accounts, there has been a grace period and those accounts have not been reported as delinquent to the credit bureaus.
That grace period ends on September 30, 2024, and roughly 20 million borrowers are bracing themselves for impact.
For those millions of borrowers, the end of the grace period means a return to the financial burden of regular loan repayments. Some, though, are not planning to make those payments, regardless of the consequences. We’ve experienced a period of inflated credit scores, but the end of this grace period could be a hard correction.
On top of that, record-high credit card debt was reported in Q2 2024.
How should lenders prepare for the end of the student loan repayment on-ramp?
Prepare for a change in the economy.
The end of the grace period will have ripple effects on the broader economy. The resumption of student loan payments could lead to a decrease in consumer spending as borrowers redirect their financial resources towards loan repayments. This reduction in discretionary spending can impact various sectors of the economy, from retail and leisure to housing and automotive industries. Businesses may see a decline in sales and revenue as consumers prioritize loan payments over other purchases, leading to a slowdown in economic growth.
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Evaluate your consumer communication strategies.
Now, more than ever, it will be critical to remain in touch with consumers who are struggling. Using multiple communication channels, such as emails, SMS alerts, and social media platforms, can ensure that borrowers are well-informed and empowered to take action. Don’t forget: the message is just as important as the medium. Proactive outreach, with the right messaging, will help lenders identify struggling borrowers early on and offer proactive assistance before issues escalate.
Diversify your post-charge off approach
Inevitably, the end of the student loan repayment grace period will cause some shift in how consumers pay back other debts, which will affect lenders’ acquisition strategies. When issuing new credit is difficult, it’s beneficial for lenders to focus on their collections strategies. It might be time to consider working with a third-party, or to develop a strategy related to debt settlement.?
As borrowers and policymakers prepare for the end of the student loan repayment grace period in 2024, it will be essential to consider the potential impacts on individuals, the economy, and the financial services industry as a whole. Finding ways to support borrowers in their transition back to regular loan payments, implementing financial assistance programs, or exploring policy solutions to address student loan debt burdens can help mitigate the challenges posed by the end of the grace period. By understanding the multifaceted effects of this milestone, stakeholders can better prepare for the changes ahead and work towards creating a more financially secure and resilient future for borrowers and the economy as a whole.