After a pause of over three years, federal student loans are set to resume following the Covid-19 pandemic. Initially, the government declared a national emergency, halting student loan payments and setting the interest rate of eligible federal student loans at 0%. However, the payment pause recently came to an end after Congress passed a law.
Interest and Payments Schedule
Starting from September 1st, interest on student loans will begin accruing again, and payments are scheduled to recommence in October. The Education Department will notify borrowers prior to the restart of payments, while loan services are expected to issue billing statements or notices at least 21 days before the first payments are due.
Introducing the New SAVE Plan
The recently announced SAVE Plan is an income-driven repayment plan available for specific federal loans. It determines payments based on the borrower's discretionary income and family size. Under this plan, borrowers who make consistent payments will see their loans no longer accumulate unpaid interest.
Associate professor Jodi Letkiewicz from York University believes that the interest portion of the plan can be especially beneficial in helping students pay down their debt. She refers to a concept in behavioral economics called the "goal-gradient hypothesis," which suggests that people tend to intensify their efforts as they get closer to achieving a goal.
Letkiewicz states, "One of the problems that we'd heard from students is like, 'I'm making these massive payments, my balance is going up, I'm never getting out of this hole.' And that can be really deeply discouraging." However, she points out that the SAVE Plan changes this narrative by making the goal of becoming debt-free more attainable as the loan balance decreases.
Eligibility for the SAVE Plan
According to the U.S. Department of Education website, the following loans are eligible for the SAVE Plan:
Education Loan Update: Repayments Restarting and Impact on Stocks
Stocks That May Be Affected
According to industry analysts, top-of-mind stocks that could experience effects from the restart of student loan repayments include:
- Affirm Holdings (AFRM)
- SoFi Technologies (SOFI)
- Discover Financial Services (DFS)
- Navient (NAVI)
Potential Pressure on Digital Lenders
Eugene Simuni, Managing Director at MoffettNathanson, highlights that digital lenders catering to lower or middle-income demographics may face some pressure due to the resumption of student loan repayments. For example, Simuni mentions Affirm, a 'buy now, pay later' company, which acknowledged repayments as a headwind in their recent earnings call. Concerns about consumers' ability to repay loans and sustain spending are considered key factors impacting these lenders. Simuni rates the stock as Market Perform.
Potential Benefits for Student Lenders
On the other hand, student lenders are expected to benefit as repayments restart and the lending environment normalizes. According to John Hecht, Managing Director at Jefferies, SoFi, Discover, and Navient are among the stocks in this sector that are rated as a Buy by the firm. Hecht explains that when payments restart, there is a greater likelihood of borrowers considering refinancing their loans. Although the interest rate environment has changed recently, there is potential for refinancing activity to resume. General loan demand in the private markets is also expected to improve.
Additional Resources for Students
If you have questions or need more information regarding federal student loan repayment plans, you can refer to this page. Additionally, you can find explanatory videos on student loans here.