Resumption of Federal Student Loan Payments

Dear Boards of Directors and Chief Executive Officers:

The U.S. Department of Education’s COVID-19 relief for federal student loans is ending. Federal student loan interest resumed on September 1, 2023, and payments restart in October 2023.¹ 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 NCUA 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 2020, 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 2021, the U.S. Department of Education expanded COVID-19 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 2023, Congress passed a law preventing further extensions of the federal student loan payment pause.²

The U.S. Department of Education is now providing a 12-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.³

Impact on Student Loan Borrowers

As of June 2023, 43.6 million individuals held a combined federal student loan debt of $1.64 trillion; an average of approximately $38,000 per borrower.⁴ 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.⁵

Risk Management Principles

As communicated in the NCUA’s 2023 Supervisory Priorities, NCUA 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.⁶

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.⁷ 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.⁸

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.⁹ Exposure greater than 100 percent of net worth should prompt enhanced performance monitoring.¹⁰ 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 StudentAid.gov, the NCUA’s consumer facing website at MyCreditUnion.gov, and the Consumer Financial Protection Bureau’s blog at ConsumerFinance.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.¹¹

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.¹²

Conclusion

This letter outlines prudent risk management strategies for your credit union to consider as borrowers resume making their federal student loan payments. The NCUA 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 NCUA examiner or regional office with any questions.