Speaker 1Elevated household debt levels, high inflation, and economic uncertainty. As recession fears mount, analysts are digesting an array of data for signals to gauge the financial health of the American consumer. DV01's In the Trotches of Structured Finance podcast dives into consumer data to explore macroeconomic trends, loan performance, and monetary policies. Here's your host, Vadim Verhoglad.
Speaker 2Hello, everyone, and welcome to another edition of the In the Trotches of Structured Finance podcast. I'm again your host, Vadim Verhoglad, coming to you with the aforementioned more frequent commentary. A relatively short one this week, because this pings on one of the questions that we got at the consumer credit webinar and really dovetails into a piece of research we recently published. The question in the webinar was about student debt repayment, specifically how much pressure has been driven by the end of the federal student loan repayment pause on ramp in 2024, and what is the potential future impact of the end of the safe plan forbearance? Entirely unrelated, the reason this question came up is because we actually saw another publication from the ABA talking about another kind of impending student loan debt doom story because now the DOE would implement more aggressive servicing practices to handle seriously delinquent notes. You know, journalistic integrity aside, they started to say that this would impact consumer credit performance. And so both of these points gave us the desire to update our listeners about what we're seeing in student debt again. Normally we do student debt updating every six months because quarterly changes aren't that big, but this one prompted us to do a quarterly update and specifically discuss these two points. So with that, let's get straight into it. Truth of the matter is, the question of student loan performance had generated speculation before the end of the student debt repayment moratorium. Every single time the headline came out saying, as soon as the only reason that performance is good is because people aren't paying their student debt, once the student debt kind of gets in there, it's going to be, you know, it's going to be a real problem and all of this, all of this stuff. Then as soon as the repayment started happening, you started getting the doom headlines. Whether it was 2022 when repayment, the moratorium ended. Then it was 2023 when there was a grace period before people had to kind of start resuming payments. Then it was 2024 when delinquencies would be reported. And then it was, and it's now with the end of the same plan forbearance. So the functional resumption of student debt, let's just remember our timelines, really occurred in October 2023. That's when interest began accruing because for a period of 22 to 2023, there was a period where you could start repayment, but interest would not be accruing on. Kind of the unpaid debt. So October 23 is when interest started getting paid out. And even then the initial shock was mitigated by the aforementioned safe plan enrollment, which, you know, went into effect for millions of borrowers. And that's when payments kind of resumed in 2023. The interesting thing is that September, 2023 was another and really critical inflection point, but for the exact opposite reason, that was the first month that you started to see seasonally adjusted outperformance in the consumer unsecured space. Recall that prior to that, consumer unsecured had by far its worst two years in history. You saw record impairments, you saw record charge-ups, you saw the risk at that point, we were actually forecasting it too, that bottom grade ROIs on some of the worst 22 vintages would actually be negative. Hadn't seen negative ROIs in the space since '08, '09, when nine, you know, when the sector was its infancy and most of the players that are around today didn't do it. And that didn't wind up happening, and September, 2023 was the first month that we started to see the seasonally adjusted outperformance. That adjusted outperformance has lasted for three years. Pretty much been there every single month. So 2023, that deadline came not just without a hitch in credit performance, it was the start of the credit performance improvement across most sectors. Then was September, 2024 with the delinquency resumption. That really had unfortunate times. I mean, because it coincided with the twin hurricanes of Harleen and Milton, which obfuscated aggregate performance really through early 2025, because you saw the delinquency spike, you saw it cutting down, and there isn't a breakout in delinquencies by region in the student aid data. So we kind of go with what's there. But even looking from 2025, the only thing that you saw was actually an acceleration in performance improvement. Where not only did you start to see the numbers go down, which you had been seeing throughout 2024, but you saw the numbers start to go down and start to really resemble historical levels. You'd already seen a massive improvement in charge-offs. You'd seen a massive improvement in impairments. And you started to see record highs on things like cure rates and record, you know, kind of record improvements on an impairment net basis. And new impairments kind of started to really turn around. You started to see record ROIs. So the forecast that this particular occurrence would bring about all of this is negative consequence was actually the exact opposite of what happened. So both times that the student loan market saw major milestones, lose anything, an acceleration of improvement in credit performance across other asset classes. More to the point, the energy spike that we've seen in 2026, and we've covered this in other podcast episodes we're going to cover in a future one upcoming, hasn't brought about excess borrowing. Short answer, has not brought about excess borrowing. And likewise, we don't see it bringing around. We haven't seen it. We haven't seen it impact credit performance. Hasn't been mad at major deterioration across asset classes. If anything, it's actually seen a little bit of improvement in consumer unsecured and even some in auto and certainly in mortgages. Now more importantly, let's talk about what's actually happening in the student debt side. And let's tackle the first question. The on rapid delinquencies didn't bring about behavioral changes in other asset classes. Student debt directly, as we'll discuss shortly, there has been a substantial decrease in delinquencies over time. And the use of the safe plan has already declined quite substantially, you know, safe plan status was kind of peaked out in 2020, early 2025 and you've seen kind of safe plan usage come down quite substantially over the past few quarters to the point now where save plan balances, as I said, are peaked out actually in quarter one 2025 and they've come down already by a factor of about. 25%. And they will keep coming down over time. Those loans will transition and they've already talked about other kinds of federal income based repayment plans that are going to become available. And with that decrease in safe plan usage, we haven't actually seen a massive pickup in delinquencies. It's actually been quite the opposite. And as for the ABA article, we're no stranger to sensationalism and credit performance. We've been dealing with this for really, since we started publishing macro reports and dating even before that. Why we really dislike that particular article and why we find it so perniciously negative is because the more you put these narratives out there, the more you talk about excessive credit usage or a low savings rate, or, and the more that people misread aggregate statistics and use that to cast judgment on what's happening in household. It's not just something that can roll off the tongue, it actually hampers the ability to address the real challenges that are being faced by households. Why? Because the minute you throw these scary numbers around record credit card debt or the fear of the end of foreclosure moratoriums or anything of that sort, it allows a certain segment of the population, the households, the kind of business community to cast blame for what's going on on the borrowers, cast blame for affordability or low savings rate on households. They're just keeping up with the Joneses. They're, you know, spendthrift and they're, you know, living this lifestyle. And all of that, not only is it for entirely the opposite of what the truth is, because in reality, spending has already started shifting into necessities decades ago. If you look at household expenditures from the BLS consumer expenditure survey, necessities covered north of 85 or 90% of household expenditures. And when you create all of these false narratives around household weakness and kind of this behavior or that behavior. It seems like as hard as opinion is instead, though, it detracts from the ability to tackle the real problems. And it detracts from the ability to tackle affordability. It detracts from the ability of making education affordable or, you know, creating effective, you know, training opportunities or anything of that sort that really addresses the long term sustainability problems, because it allows you to castigate some of the blame or a lot of the blame for some people onto the households themselves in reality, that's just not the reality on the ground. So we'll get off our soapbox here. I promise you guys, it's not our favorite thing to do, but it is important when you're getting a lot of this kind of false narrative behavior going out there about what's happening in student debt. And then we'll start talking about what's actually happening in the student debt world. So in aggregate, the second quarter of 2026 student debt balances did reach another record high. Most of that is seasonal patterns because of just the timing at which debt kind of gets repaid. that factor. But a lot of the most important thing is much of the increase that we've seen in terms of the way the student aid office is reporting it is driven not by people borrowing more principal, but rather by people not paying down the principal and instead accruing interest, which we think is driving a lot of the gains that you've seen over the last three, four, maybe even over the past five or 10 years. We've discussed this before, but the federal student aid office's methodology for reporting balances includes not just interest owed, but also unpaid interest in a capitalized fashion. That creates a pretty large distortion, specifically in this asset class, given the huge amount of loans that are on income-based repayment plans, where in some cases the interest is not fully being paid. Why we think that unpaid interest is such a big difference is because you're not seeing a significant growth in the number of loans. Instead, loan counts have pretty much remained static over the last few years. They're still down actually quite a bit from 2022 levels, but balances are much higher. And aside from 2023 and 2024, which are atypical, mainly due to administrator transitions, like shifting into safe plans and things of that nature, loan counts really haven't changed much. And in fact, this divergence between balance and loan growth is highlighting how non-amortizing repayment structures accumulate interest over time, therefore making the aggregate debt balances grow without an increase in loan counts. Probably more interesting than the aggregate behavior continues to be the dynamic of lending across the board. So I think that's a really good point. In this regard, student debt balances continue to drift significantly older. Borrowers ages 25 to 34 have experienced the sharpest balanced reductions of any age cohort over the past few years. That's including unpaid interest, by the way. So even with that factor in there, borrowers ages 25 to 34 have experienced the largest relative reduction of any age cohort, while borrowers age 18 to 24 have seen that reduction happening for the better part of 11 years. For some context, student debt that's held by borrowers age 34 and younger is now just 21% higher than that held by borrowers over age 40. Not only that, that number has been coming down so heavily that it's going to reach parity by either 2027 or 2028. If you can imagine that. People over 40 are going to owe more student debt than people under 40. Why that's happening is because in a lot of cases, what you're seeing is that lower and undergraduate borrowing costs among younger people is really the driver here. Because while everybody makes a lot of headlines about the nominal growth in tuition, especially at private schools, private four-year schools, which is obviously a very large cohort of people applying, the reality is that adjusted for not just inflation, but adjusted for also the fact of the fact that the student debt that's held by borrowers age 34 and younger is going to reach parity by 2027 or 2028. So if you can imagine that in a lot of cases, what you're seeing is that lower and undergraduate borrowers age 34 and younger is going to reach parity by 2027 or 2028. So what you're seeing is that lower and undergraduate borrowers age 34 and younger is going to reach parity by 2028. have fallen by nearly 1 million over the past two years, the sharpest pace of decline of any age cohort in any of this report in history. And why this is happening is we think that a large in a large case, people are exiting undergraduate school debt with not a ton of debt because of those aforementioned grants and other factors. And when they're able to get gainful employment, because as we've covered in our previous research, there's been a large shift away from liberal arts degrees to STEM degrees to medicine degrees. And when they're able to get gainful employment, because as we've covered in our previous research, there's been a large shift away from liberal arts degrees to medicine degrees. And when they're able to get gainful employment, because million borrowers out of a total pool of 45 million owe 21% of the debt. That kind of skew doesn't even exist in mortgages. The reason there, quite frankly, is just grad school debt. We talked about what was happening in tuition for undergraduate school, because that's the reporting that really happens. Grad school is completely different. You absolutely see hundreds of thousands of dollars of grad school debt, especially in medical school where borrowers carry the highest debt load because of reticency, because of how long that school takes, etc. So it's not uncommon to see half a million dollars or even more of debt outstanding when you include an unpaid interest. Probably even 70 figures is not unheard of. Unfortunately, the student aid office doesn't differentiate income-based repayment by the grad versus undergrad debt, which is kind of skewing the true driver of balance concentration. And nor is their grad debt reporting really kind of clean. They have a report that shows the grad plus program representing about $130 billion. That is not the extent of grad school debt. Let's just be honest. Grad school debt is far, far higher than $130 billion. Some estimates out there have said that grad school debt represents something like 40 or 50% of student debt outstanding, and that number would not be surprising to us. Speaking of repayment plans, IDR plan, meaning income-driven repayment plans, continue to grow rapidly as even restriction factors from 2023-24 that briefly kind of shut those down, fade into the rear view. And usages are still very, very low. So I think it's a good idea to look at that. I think it's a good idea to look at that. I think it's a good idea. And usage is largely returning to its kind of peak 2022 level. We expect it to be back to those levels in 2027. Again, IDR plan balance growth is much faster than, but it's directionally similar to loan count growth, meaning there are still more people using IDR plans, but the ones that do, do seem to be having much higher balances. And a large part of that is the fact that IDR plans, if people that are paying less than the interest are going to have accrued interest. That said, the alignment between IDR with loan count growth is going to be much higher. I think it's a sign of optimism. We think it's reflecting both the shifting plan types, possibly higher incomes, or maybe borrowers making larger payments while remaining on IDR plans rather than just exiting IDR entirely. And lastly, let's talk delinquency, since that seems to be top of mind for everybody talking student debt. Why the conversations are coming up now is kind of surprising to me. It would have been logical to be talking about this in 2025 when you saw the delinquency rates where they were. In 2026, superintendents were going to be talking about the delinquency rates where they were. Delinquencies continue to fall. The increase, the improvement in 2026 has been massive. 30 plus delinquencies have fallen more than 14%, 14% in total in the first two quarters of this year. On a relative basis, that is a 40% decline from Q4 2025. It's by far the fastest pace on record. To be sure, some of that decline is seasonal. There is a seasonality factor to this. That's not all of it. That is far from all of it. There is a lot of organic decline there. Some of that is going to be borrowers moving out of delinquencies into a payment plan. No question about it. But that doesn't mean there are payment plans available. The truth of the matter is that aggregate delinquencies are now below 2015 levels for the first time since the resumption of student debt repayment in 2024 and the reporting of delinquencies. We're below the 2015 level, far below the 2014 levels. Moreover, when you think about the rate of new delinquencies, that's the 30 to the 90-day delinquency rates. They fall into their lowest record, since at least 2014. because the data doesn't go back further than that likely lowest since pre-gfc days and are below the 2018 lows that we saw in the data to be sure the 90 bus plus bucket is elevated but that's also the bucket that's seen the largest improvement and let's remember borrowers started getting delinquency reporting in the third quarter fourth quarter of 2024 doesn't clean up that quickly there's going to be a lot of borrowers that are still working with servicers that are that have exogenous events etc some of these things do take time but more importantly what we're dealing with in delinquency we're dealing with the overhang of the delinquency surge that occurred when delinquency report is starting more and more of those loans will get worked out some of them will be worked out through charge off some of the worked out to loss mitigation some will be through income-based repayment plans it's not really a question of hey is this extended pretend yes there are income-driven repayment plans yes that is a factor but the truth of the matter is when you think about the principal you're not going to be able to get a lot of money out of it outstanding in the student loan debt market to us it's likely falling because loan counts are flat and we're seeing substantial kind of declines in again loan counts and loan counts for younger people especially and there's other exogenous factors that given the kind of rhetoric around student loan behavior that's going on is something we're going to be covering in future research and then certainly in future podcast episodes but with that we conclude today's podcast this is unusual one for us we don't typically again we typically publish student debt biannually we discuss it relatively recent in our research but given the fact that we got a webinar question on it and we saw an aba article on it and people are it's kind of been something that's made the rounds in the news recently it's something that we thought was absolutely worth bringing up please like share subscribe please rate us on your podcast platform of choice it takes two seconds with that i've been your host vadim rojo glad signing off and see you guys soon take care everyone thank
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