An analysis utilizing monthly consumer credit data shows the majority of student loan payoffs occur early and coincide with large payments and balance reductions on other student loans and revolving credit products, the Bureau of Consumer Financial Protection (BCFP, also known as CFPB) said in releasing a new report produced by its Office of Research (OFR).
The patterns found in the report, the bureau says, highlight the interconnected nature of borrowers’ finances, as repayment of one type of debt affects payments and borrowing on other types of debt.
The bureau said the typical student loan has a term of 10 years and features equal monthly scheduled payments. Borrowers may, however, pay their loans off early at any time by using savings, gifts, or other resources, or by refinancing with a new loan – and the research, presented in a “Data Point” report, showed that most prefer to do so with a single large payment when they can.
“The timing of this payment coincides with a broader reduction in existing debts and is followed by increases in home purchases,” according to a blog post Friday by bureau economist Thomas Conkling. “However, for those borrowers who are unable to, or choose not to, pay off their loans early, the reduction of other debts that follows their final payment suggests that their required monthly student loan payments constrained their ability to pay down these other debts.”
Conkling noted that student loans make up an increasing share of the debt held by borrowers around the country, particularly for younger borrowers.
The OFR report, which focuses on those who are successfully repaying their loans, looks at how borrowers first pay off a student loan and what happens next. Conkling summarized the key findings, as below:
- Most borrowers paying off a student loan do so before the final payment is due, often with a single large final payment. The median final payment made on a student loan is 55 times larger than the scheduled payment (implying a payoff at least 55 months ahead of schedule), with 94 percent of final payments exceeding the scheduled payment and only 6 percent of loans paid off with the final few payments equal to the scheduled payments. Even among loans within five years of their scheduled payoff date, for which refinancing is uncommon, the median final payment is more than seven times larger than the scheduled payments made immediately prior.
- Borrowers paying off a student loan early also reduce their credit card balances and make large payments on their other student loans at the same time. In addition, these borrowers are 31 percent more likely to take out their first mortgage loan in the year following the payoff than in the year preceding the payoff. While this is evidence of a link between the timing of student loan payoffs and home purchases, the simultaneous reduction in credit card and other student loan balances suggests that increased wealth or income may influence when borrowers pay off student loans, reduce credit card balances, and purchase homes.
- The smaller share of borrowers who pay off their loan according to the scheduled payments pay down, rather than take on, other debts in the months following payoff. Paying off a loan reduces borrowers’ monthly payment obligations, and those with additional student loans put 24 percent of these savings toward paying down those other student loans faster. Borrowers also use 16 percent of the drop in their required payments to reduce credit card balances. Unlike for borrowers paying off a student loan early, those paying off on schedule are not more likely to take out a mortgage for the first time.
The analysis focused on student loan borrowers who are successfully paying off their loans, but Conkling noted that similar approaches could be applied to the large population of student borrowers struggling with rising balances, delinquency, or default. “Such research could shed light on how borrowers use other credit products to cope with their student debt, how their access to other credit may be inhibited, and how available repayment plans and other programs change these outcomes,” he stated.
In its analysis, the OFR used monthly data from the bureau’s Consumer Credit Panel (CCP), a panel of of de-identified credit records for a 1-in-48 nationally representative sample of consumers with a credit record from one of the three nationwide credit reporting companies. These credit records provide the outstanding balances and payment histories of all tradelines (loans and revolving credit accounts) for each consumer in the sample.
For each student loan, the CCP contains the origination date, term length, deferment status, delinquency status, payment amount, and balance throughout the life of the loan. These data also include the year of birth and commercially available credit score for each consumer in the panel, updated each quarter.