Resumption of Federal Student Loan Payments: Letter to Credit Unions October 2023 23-CU-08
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This episode covers NCU A's Letter
to Credit Unions on Resumption
of Federal Student Loan Payments.
The following is an audio
version of that letter.
Dear Boards of Directors and
Chief Executive Officers:
The U.S.
Department of Education’s COVID-19 relief
for federal student loans ended . Federal
student loan interest resumed on September
first, and payments restart in October.
As federal student loan payments
restart, some credit union members
may have difficulty meeting
their repayment obligations.
The resulting increase in total
repayment obligations may also
negatively impact members’ ability
to repay other outstanding loans.
The NCU A encourages credit unions
to work constructively with impacted
borrowers and will not criticize a
credit union’s efforts to provide prudent
relief to borrowers when such efforts
are conducted in a reasonable manner
with proper controls and management
oversight and consistent with consumer
financial protection requirements.
Background
In March of twenty twenty, the U S
Department of Education’s office of
Federal Student Aid initiated temporary
relief for federal student loans owned
by the U S Department of Education
by suspending loan payments, stopping
collections on defaulted loans, and
reducing interest rates to zero percent.
Additionally in March
Twenty Twenty One, the U.S.
Department of Education expanded COVID
nineteen emergency relief measures
to defaulted federal student loans
that were made through the Federal
Family Education Loan program.
Federal student loan relief was
subsequently extended multiple times.
However, in June twenty twenty
three, Congress passed a law
preventing further extensions of the
federal student loan payment pause
The U S Department of Education is
now providing a twelve-month on ramp
to repayment, starting on October 1,
2023, and ending on September 30, 2024.
Financially vulnerable borrowers who miss
monthly payments during the on-ramp will
not be considered delinquent, reported
to credit bureaus, placed in default,
or referred to debt collection agencies.
Borrowers who can make payments were
advised to do so, but the on-ramp provides
an adjustment period for borrowers
who cannot immediately make payments.
Impact on Student Loan Borrowers
As of June 2023, 43 point 6 million
individuals held a combined federal
student loan debt of 1.64 trillion
dollars ; an average of approximately
38,000 dollars per borrower.
Inflation and elevated interest
rates have strained the budgets
of many credit union members.
For many borrowers, the resumption
of federal student loan payments
represents an immediate, and in some
cases substantial, payment stress
due to the increase in their total
monthly repayment requirements.
Many borrowers have also increased
their overall debt during the
federal student loan deferral period.
With federal student loan payments
now restarting, borrowers may have
difficulty remaining current on
their other loans while also making
their renewed student loan payments.
Additionally, the decrease in the
personal savings accumulated during
the early stages of the pandemic
has reduced the financial buffer
available to many borrowers to mitigate
increased or unexpected expenses.
Risk Management Principles
As communicated in the NCU A’s
2023 Examination Priorities, NCU A
examiners will review the soundness
of existing lending programs at credit
unions, adjustments to underwriting
standards, portfolio monitoring
practices, and loan workout strategies.
Additionally, examiners will review
policies and procedures related to
the Allowance for Credit Losses (ACL),
documentation of the ACL reserve
methodology, and adherence to generally
accepted accounting principles.
The resumption of federal student loan
payments presents a payment stress
that may affect borrowers’ ability to
repay their other outstanding debts.
This change in payment requirements
will have a more pronounced impact
on lenders that did not consider
federal student loan payments in
debt-to-income or debt-service-coverage
ratios during underwriting.
While the U.S.
Department of Education’s 12-month
on-ramp provides some protection for
borrowers, lenders may experience
an increase in delinquencies and a
reduction in borrowers’ credit scores
during or after the end of the on-ramp.
Borrowers with federal student loans
can also represent a concentration
of credit risk, depending on how
many of the credit union’s borrowers
have federal student loans.
For the purposes of this letter, a
concentration of credit risk refers to
a material exposure that shares common
characteristics or sensitivities that
can result in correlated deterioration
in loan performance or elevated losses.
In this case, federal student loans
represent a common characteristic
among many credit union borrowers.
The payment stress that federal student
loan borrowers may experience at the
same time as their federal student
loan payments resume may result in
a correlated deterioration in loan
performance or increased losses
within credit union loan portfolios.
To ensure your credit union operates in
a safe, sound, and fair manner, please
consider the following strategies when
evaluating your credit union’s exposure to
borrowers facing payment stress associated
with their federal student loans, and the
adequacy of your credit union’s related
policies, procedures, and practices.
Risk Assessment—Credit unions
should assess aggregate exposure to
borrowers with federal student loans.
The materiality of a credit union’s
exposure, specifically risk to net worth,
from borrowers with federal student loans
will determine what prudent steps should
be taken to address the associated risks.
Exposure greater than 100 percent
of net worth should prompt
enhanced performance monitoring.
This exposure can be analyzed in a
variety of ways, such as by identifying
borrowers with large student loan balances
relative to their income, reviewing
borrowers’ credit bureau information,
querying member transaction history from
before the federal student loan repayment
pause to identify members making their
federal student loan payments out of
their account at the credit union, or
considering other indicators such as
the number of members who have private
student loans with the credit union.
Borrower Outreach—Credit unions
should contact borrowers facing
potentially large federal student loan
repayments, as well as other high-risk
federal student loan borrowers, to
inform them about the credit union’s
eligibility standards and processes
for requesting loan modifications.
Monitoring increases in credit
card and line of credit usage after
federal student loan payments restart
may preemptively identify financial
stress for borrowers using available
credit to cover other expenses.
Credit unions can encourage borrowers
to prepare for payments to restart,
research repayment plan options, and
apply for loan forgiveness(if applicable).
Additional information can be found on
the Federal Student Aid website at Student
Aid dot gov, the NCU A’s consumer facing
website at My Credit Union dot gov,
and the Consumer Financial Protection
Bureau’s blog at Consumer Finance dot gov.
Underwriting and Modifications—Credit
unions should apply prudent
underwriting and loss mitigation
strategies for borrowers experiencing
financial difficulty and struggling
to make their loan payments.
The use of well-structured and
sustainable loan modifications is
often in the best interest of both
the member and the credit union.
Loan modifications should be consistent
with the nature and severity of the
borrower’s financial hardship and
should consider the amount of the
borrower’s federal student loan payments.
Modification terms should also be
consistent with the type of loan being
modified and should have sustainable
repayment requirements based on the
borrower’s financial condition and ability
to repay under the restructured terms.
Portfolio Monitoring—Credit
unions should identify and monitor
higher-risk portfolio segments with
student loan payment stress exposure.
Higher-risk segments could include
related loan types or sections of the
portfolio with multiple layers of risk.
Examples include, but are not
limited to, borrowers with:
Private student loans;
Credit card balances or other
debt obligations that materially
increased while federal student loan
payments were paused or that begin
to increase following the resumption
of federal student loan payments;
Adjustable-rate loans that have
similar payment reset timeframes—for
example, adjustable-rate mortgages
or home equity lines of credit; or
Elevated debt-to-income
ratios or low credit scores.
Credit unions should closely monitor the
performance of borrowers with federal
student loans, including how existing
loan performance changes following
the resumption of federal student loan
payments and following the end of the U.S.
Department of Education’s
12-month on-ramp.
Management should periodically
and in a timely manner update the
credit union’s board on any relevant
and material risk exposures.
Allowance for Credit Losses—Credit
unions need to consider whether the
risk associated with the resumption
of federal student loan payments is
adequately captured within the ACL.
Accounting Standards Codification Topic
326 requires expected losses to be
evaluated on a collective, or pool, basis
when financial assets share similar risk
characteristics, but does not prescribe
a process for segmenting financial
assets for collective evaluation.
Financial assets may be segmented based
on one characteristic or a combination
of characteristics, and management should
exercise judgment when establishing
appropriate segments or pools.
Conclusion
This letter outlines prudent
risk management strategies for
your credit union to consider
as borrowers resume making their
federal student loan payments.
The NCU A encourages credit unions
to work constructively with impacted
borrowers and will not criticize a
credit union’s efforts to provide prudent
relief to borrowers when such efforts
are conducted in a reasonable manner
with proper controls and management
oversight and consistent with consumer
financial protection requirements.
Please contact your NCU A examiner or
regional office with any questions.
This concludes the NCUA Letter to
credit unions on the resumption
of Federal Student Loan payments.
If your Credit union could use assistance
with your exam, reach out to Mark Treichel
on LinkedIn, or at mark Treichel dot com.
This is Samantha Shares and
we Thank you for listening.
