Kevin King, vice president of credit risk and marketing strategy at LexisNexis Risk Solutions, said last week that reducing student debt by $10,000 should improve consumer credit quality for many consumers. He said the plan would be a test for credit unions' ability to understand how members are impacted and respond to their needs.

The Department of Education estimated that 43 million Americans would qualify for some relief and about 27 million borrowers will be eligible to receive up to $20,000 in relief. About 20 million of them will have their federal student loan debt wiped clean.

CUNA Senior Economist Dawit Kebede said wiping out up to $20,000 in student loan debt will have little impact on borrowers because for the last few years their payments have been suspended because of the COVID-19 pandemic.

Dawit Kebede

"The expected impact on loan quality has already happened; and the forgiveness will not change things relative to what we saw in the last two years," he said.

However, he said a rule proposed by Biden would have an impact. It would cap student loan payments at 5% of borrowers' discretionary income on undergraduate loans — down from the 10% under the U.S. Department of Education's most recent income-driven repayment plan.

"The new cap, which lowers monthly payments, should make it easy for borrowers to pay for their loans in the future compared to the pre-pandemic period," he said.

"Twenty million people will see their outstanding balance cancelled as a result of this action and most will see a relief," he said. "The new monthly payment cap saves individuals $1,000 per year on average. This relief allows people to allocate the saving towards retirement, down payment to buy a house, or other spending priorities."

Wright-Patt Credit Union of Dayton, Ohio ($7.2 billion in assets, 462,981 members as of June 30) doesn't know how many members would benefit from the student loan forgiveness.

Hennessy Harris, director of indirect lending, said most members' credit scores have been improving, and the forgiveness will help that trend to continue.

"The biggest impact to scores occurred when the federal moratorium was enacted, moving members who were in default to deferment status," Harris said. "The positive movement will be from members who have reduced payments, who can now afford to pay off or down other debts. The key is that borrowers use this to pay down other debts instead of taking on new debt."

Hennessy Harris

Harris doesn't expect the forgiveness will have much effect on loan demand at the credit union "since the thresholds for the proposed forgiveness program is limited to $10,000 or $20,000," but she said the program can make a difference to individual borrowers.

With their debt obligations lowered, Harris said borrowers will be able to:

• Save additional money for retirement;
• Afford a new or newer vehicle;
• Purchase a home where they might not have been able to before; and
• Pay other delinquent obligations, which, long -term, will help improve their credit score.

"I believe this will help members reduce their monthly obligation but not fully pay off their debt overall," she said. "Having a lower monthly obligation will likely give members the opportunity to buy a car or possibly become a homeowner, but we don't expect to see a significant increase in loan demand."

As for the policy's potential to fuel inflation, she said it's hard to know. "This is certainly going to help people manage student loan debt better, but we don't see this causing a big swing on inflation one way or another."