Gathering Storm
Christopher Viale says student-loan deferments, set to end in February, may pose issues for families who haven’t paid them back in a while.
During times of recession or economic upheaval, the last thing economists expect is for credit-card debt to fall.
Yet, that’s exactly what happened during the first year of the pandemic. According to Experian, from the third quarter of 2019 to the third quarter of 2020, credit-card balances fell by 24% nationally. The percentage of credit-card users carrying an interest-bleeding balance month to month fell from 58% to 53%, according to the American Bankers Assoc.
One reason was that this was no normal economic downturn; during the early months of COVID-19, businesses were shuttered, restaurants were closed, and consumers simply reduced their spending dramatically — even if they were still working, and despite the government stimulus checks.
“For the first year of the pandemic, people weren’t really spending; they were paying down debt. Record amounts of debt were being paid down,” said Christopher Viale, CEO of Cambridge Credit Counseling in Agawam.
But that has not been the case in 2021.
“When things started opening up a little bit, people went haywire; they started spending like crazy,” Viale noted. “Credit-card debt has increased by 13% over the last quarter, which is the most it’s ever increased in a quarter.”
“For the most part, consumers have been in a good position, but then, when all these debts start to come due again, it’s going to be a very difficult time.”
Basically, stimulus worked — in the sense of stimulating spending. “You got free money, the $250 tax credit per child, you got whatever other government programs were there … people had a lot of money in their hands. Even though they weren’t working, the unemployment checks they were getting were as good as if they were working. So, for the most part, consumers have been in a good position, but then, when all these debts start to come due again, it’s going to be a very difficult time.”
And that’s what economic leaders — and people like Viale, who help families get out of debt — worry about. The increased spending in 2021 has coincided with an end to loan-deferment programs launched at the start of the pandemic, and if they haven’t been paying attention to their budget, many families might be in for a shock.
“It really is a perfect storm,” Viale said. “Consumers have had the ability to not pay their rent or mortgage or credit-card payments. Most, if not all, of that has ended, except for the 800-pound gorilla, which is student loans.”
Those will continue to be in moratorium until Feb. 1, which is when $1.3 trillion of debt will start to be drafted back out of consumers’ checking accounts. “Yes, they are being alerted and warned to be ready, but after not paying on these loans for almost two years, it’s going to be a shock for many.”
All of this has banks — with whom Viale talks all the time — worried about huge loss rates due to credit defaults starting in late 2022 and early 2023. In short, we may be heading into perilous times for household debt.
Change of Plans
According to a recent CreditCards.com survey, 44% of respondents they are willing to take on debt in the second half of 2021 for non-essential purchases, such as dining out.
That marks a dramatic change from savings-happy 2020. Even after that temporary dip in debt in 2020, 42% of U.S. adults with credit-card debt have increased those balances overall since the pandemic began in March 2020, according to a Bankrate.com survey conducted in September.
“It’s been an upside-down credit environment,” Stephen Biggar, who covers financial institutions at Argus Research, told CNBC this month. “If you told me the market was going to crash 40% and we would have 20% unemployment, you would have also said card delinquency rates would go through the roof, particularly for the lower-end consumer.”
But instead, the savings rate spiked to levels not seen in 70 years, as consumers curtailed spending — and were allowed to halt payments on student loans and mortgages — and started paying back other debt, notably credit-card balances. Now, the tide has completely turned. Meanwhile, most of those deferment programs no longer offer last year’s safety net.
“People haven’t had to pay their bills for a long time,” Viale said. “Mortgage, rent, student loans, even credit cards allowed a period of time when people didn’t have to make payments.”
Unlike payment deferment for credit cards, in which interest keeps accruing, “student loans are very different because that was a true moratorium; no one was being charged,” he explained. “So whatever status someone was in with their student loans when the pandemic started is where they’re going to be in February when they have to start paying again.
“Yes, they are being alerted and warned to be ready, but after not paying on these loans for almost two years, it’s going to be a shock for many.”
But on Feb. 1, those autodrafts will begin again. “And that’s going to be a shock for consumers because they haven’t made these payments in 18 months or so.”
Politico reported that the U.S. Department of Education is considering providing student-loan relief to borrowers who miss a payment during the first 90 days after payments resume, so credit scores won’t be adversely impacted.
According to Forbes, U.S. Sen. Elizabeth Warren wants to go even further; fretting about a surge in student-loan delinquency and default once payments resume, she and other members of Congress have repeatedly asked the Biden administration to postpone the restart of payments.
The average monthly payment for student-loan debt is between $400 and $600, Viale noted. “That’s a pretty big-ticket item they haven’t had to pay for a long time, and now, out of nowhere, they’re going to have to start paying it again.”
This will only exacerbate what seems to be a looming credit crisis, Viale said, one that makes programs like Cambridge’s — which manage and pay down a client’s debt payments in a way that reduces interest costs and protects their credit rating — even more critical.
Because of concerns about consumer debt next year, the Federal Reserve is allowing such relief programs to be extended to offer consumers even more concessions if they are struggling to keep up with mortgage and credit-card payments, Viale added. “My industry has been working flat out to develop and implement these additional hardship programs.”
Back to School
It’s not easy to escape credit-card debt — especially with the average annual percentage rate topping 16%.
According to a Bankrate.com survey, 54% of adults carry credit-card balances from month to month, and 50% of have been in credit-card debt for at least a year. The average person with credit card debt owes $5,525.
And that’s only one element of household debt. Wth student-loan payments ramping back up in February, the Department of Education has launched an extensive outreach campaign to borrowers.
“They’re giving people several months notice. They’re doing a pretty good job of letting consumers know this is coming,” Viale said. “But that doesn’t really mean much when you haven’t had to do it in a long time.”
—Joseph Bednar
“This reversal is traumatic in some ways. Everything we’ve been doing for the last year and half is out the door in 10 days.”
