Is the Economy About to Get Schooled by Student Loan Repayments? Survey Says…

I love the current conversations about the economy and whether it is going to be a hard landing or a soft one. One recent article I read stated that the more we read about a “soft landing,” the more likely we are to have a “hard landing.” There are just too many variables out there and too many economists to come to a single conclusion. One of those variables is pending student loan debt, and that is especially important now that deferments that were part of the pandemic and the CARE acts have expired. Even with President Biden’s recent $9 billion student loan forgiveness, which is basically a rounding error to the estimated $1.7 trillion that is out there in student loan debt today. – there is still a large debt looming over the consumers here in the U.S. market.

This had me thinking, what will that additional expense to the household budget mean for my friends at banks and credit unions? And as it trickles down, what will this mean for the business (especially the small business) customers/borrowers of those same institutions? So, of course, we went out and asked hundreds of bankers some questions, and we got some really great feedback. Let me share with you what you and your peers think about these student loans and whether they see the economy going back to the principal’s office.

How will consumer portfolios handle the student loan repayments coming back online?

Most bankers (53%) felt that when it came to consumers and their own portfolio, there was no risk associated with new student loan repayments kicking in. In talking with one banker, the sense was that the consumer would be able to manage this or hustle their way out of it, one way or the other. But there was a huge following of bankers (40%) who felt that they would see some mild impact with consumers basically being forced to operate with less cashflow to address all their current debts. I personally tend to agree with this second group, but what was interesting is that no one felt that it would have a significant impact on the consumer portfolio.

But will that lack of consumer cash flow impact small businesses?

When it came to good old-fashioned trickle-down economics, I was interested in seeing whether bankers were concerned about what the limited cashflow would mean to their small business banking clients. In this category, an overwhelming majority — 73% of the bankers — felt that the limitations in disposable income would have a negative impact on small business revenue; 7% of them felt that it would have a significant negative impact. Not great news for the economy overall and especially for Main Street. Also, when bankers talk to small business owners, they report that over 74% of those small businesses express concern about a recession or at least a bit more of an economic slowdown.

And when you think about the economic forecast, what are your thoughts and what keeps you up at night?

When I asked how most bankers felt about the economic forecast, they were more optimistic about the overall direction; nearly half (53%) stated that in 2024 we would see more of the same, and 13% felt that we would have some mild growth. Only 20% of my respondents felt we were in for a downturn. But with all that said, when I asked about fintech, regulations, the competition, etc., the top item was the economic uncertainty we are dealing with and customer expectations following behind in the number two spot. I think this is telling of the customer-centric focus that financial institutions have to have now as banks and credit unions are fighting for those top borrowers.

In conclusion, I am not going to make my own prediction — I am not an economist; I just took a lot of economic courses while I was at a student at Brigham Young University. (By the way, while we’re on the topic of student debt, I’ll share that I send all my kids to BYU too, because the tuition is just so darn reasonable.)

The biggest takeaway from this survey and the insight from my banking friends is that the current problem (student debt) may lead to the problem for the next group (small businesses), and that while there are a lot of potential distractions, you have to keep your eye on the customer. If you do that, I think you will pass the class with an A++.

Interested in more details from the survey? Reach out to mike.horrocks@bakerhill.com to learn more.

Author Bio

With more than 25 years of experience in the financial services industry, Mike Horrocks possesses a unique and extensive blend of financial expertise, technology skills, process redesign abilities and solution management experience. Horrocks’ background enables him to create go-to-market strategies for new solutions, help clients convert strategies into revenue generating initiatives and forecast market direction.

As the Vice-President of Product Management at Baker Hill, Horrocks’ responsibilities include the identification and development of new market opportunities in the business of lending, risk management, and analytics for financial institutions. Mike holds a MBA both in International Finance and Venture Technology Management from Indiana University and a B.S in International Finance from Brigham Young University.

Before joining Baker Hill, he held executive positions within several other organizations, including Experian, Profit Technologies, SAIC, Broadway and Seymour (FIS), Zions First National Bank and Zions Data Corporation.

Horrocks is a member of many associations including the Risk Management Association and Bankers Without Borders. In his free time, he enjoys traveling internationally with his wife and five children.