Student Loan Payments Surge With Deadline Ahead: What's Next For Borrowers?

The suspension of federal student loan payments, which began in March 2020 due to the COVID-19 pandemic, is set to conclude in October.

However, an intriguing development emerged on the financial horizon. According to Goldman Sachs analyst Alec Phillips, remittances to the Department of Education have surged to levels even higher than before the payment pause was initiated.

This unexpected surge, with several weeks remaining before the first payments are due, has prompted questions about the burden that borrowers may face once the payments restart in earnest this October.

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Philips notes, “A fraction of borrowers probably resumed payments ahead of schedule, as interest begins accruing Sep. 1.”

Goldman highlighted that some borrowers persisted in making payments throughout 2020 and 2021, even during the period of payment suspension. Their payments ceased only when the White House hinted at the possibility of a forgiveness plan in April 2022.

However, following the Supreme Court’s rejection of the forgiveness plan, there was an abrupt surge in payment activity, amounting to approximately $10 billion at an annualized rate.

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Nevertheless, this recent upswing in repayments offers limited insight into how borrowers will behave when payments fully resume, according to the expert. The reinstatement of payments in full is projected to bolster remittances to the Department of Education by an estimated $70 billion annually, equivalent to 0.3% of disposable personal income, as calculated by Goldman Sachs.

However, several potential mitigating factors exist, including the likelihood that some borrowers may not immediately resume payments and that others could qualify for reduced payments under the income-based repayment plan recently introduced by the Biden Administration.”

Market Reactions

In response to these developments, SoFi Technologies Inc SOFI, an online bank offering student loan refinancing products, experienced a marginal 0.5% dip to $8.74 per share on Tuesday. SoFi had seen an 11% rise from its August lows but still traded 25% lower than its July highs.

Other key players in the student loan refinancing market, including Navient Corp. NAVI and SLM Corp. SLM, fell 2% and 0.3%, respectively, on Tuesday.

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This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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