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The Triple Threat: Student Loans, Diminished Savings, and Soaring Heating Costs

By Catherine York Powers, CEO, Constant
October 4, 2023

The pandemic-induced hiatus on student loan payments and increased savings transformed household financial habits over the past few years. With student loan payments resuming, credit unions are rightly concerned about the future performance of auto, personal and other loan types. Together with dwindling pandemic savings, an expected rise in heating costs, and persistent inflation, it's pivotal for credit union lending teams to prepare for multiple outcomes during this volatile period.

Immediate steps that can be taken to support and retain members include:

  1. Providing proactive, automated hardship relief.
  2. Engaging members nearing loan completion with tailored offers.
  3. Preemptively modifying rates to deter refinancing by other institutions when rates start to decline.

Let’s dig in.

Since student loan repayments paused in 2020, the economy has been turbulent. The cost of nearly everything has increased in the past three years. Consider this:

  • Housing: The median rent in the United States in March 2020 was $1,615 per month compared with $2,029 in June 2023.
  • Living Expenses: Utility bills over the same time period increased over 16% per month; fossil-based heating costs hit a 10-year high last year and are expected to increase 8.7% this year, and food prices are rising at the highest rate in decades.
  • Salaries: At the same time, it’s been widely reported that salary increases are trailing the rate of inflation.

Besides the daily financial pressures an average credit union member faces, their borrowing costs have risen significantly.

  • Average car payment reached an all-time high of $729 per month in Q2 2023, 11.5% higher than 2022
  • Payments on new mortgages now average $2,563, 29% higher than in 2022
  • Credit card rates are so high that making the minimum monthly payment is becoming financially burdensome

Provide Proactive, Automated Hardship Relief

Financial institutions frequently wait for borrowers to request relief instead of proactively offering it. Many borrowers, feeling self-conscious about their financial struggles, delay seeking help. By the time they do, their delinquency may be too advanced to remediate.

Today, credit unions provide hardship support during major weather events. They could similarly offer proactive relief for the conclusion of federal programs or other market-driven events mentioned earlier. Credit union executives should consider proactively offering payment skips as student loan repayments begin or at the beginning of home heating season. However, many borrowers will require longer-term solutions.

If your credit union policies allow for it, proactively extending auto and personal loan terms could help those affected by resumed student loan payments. Adding 12-18 months could reduce monthly payments by $100-150.

Term extensions are not without risks. For auto loans, it may affect future trade-ins or sales and impact gap waiver payouts in the case of total loss. Credit unions must thoroughly assess and disclose these risks during the modification process.

Automate Special Relief Programs and Let Members Self-Serve

89% of Americans use online banking so offering relief programs there is logical. Implementing a special hardship assistance program is only helpful if members know about it. Statement messages, emails, website banners, and pre-recorded hold messages all work, but given the clutter in these channels, utilizing the online banking channel to notify members that they qualify for assistance is more powerful.

It’s quite easy for a credit union to identify who is eligible for their relief programs, reach only those members who qualify in online banking and through email/SMS campaigns, and invite them to self-serve – with an add-on to your current online banking platform. This approach offers members privacy and simplicity for managing sensitive financial matters, while also reducing the manual support typically needed from credit unions during calls or branch visits.

Provide Hardship to Members While Not Inundating Your Back Office

Credit unions should standardize assistance programs to prevent errors or backlog. Tips for standardization include:

  • Create one channel for members to apply (preferably within online banking) and point all other channels to it
  • Create one set of eligibility rules so that applicants can be approved or denied without exception
  • Consider on-screen acknowledgements or eSign for term extension documents
  • Enable automation tools to speed up processing

Even with assistance programs in place, credit unions may not be able to avoid increased delinquencies due to student loan repayment, but preparing now will give members their best shot at managing increased debt payments this fall.

Connect with Constant to learn more.

About Constant

Constant's executives, experienced in managing billions in retail debt, grew frustrated with legacy core system constraints and manual operations. They boldly transitioned loan servicing from manual to digital self-service, reshaping the operations landscape. Constant’s mission is to empower members to self-serve online and help credit unions grow through meaningful interactions with their members.