This week, the Consumer Financial Protection Bureau issued a report analyzing repayment patterns for student loans and how borrowers who have repaid their student loans subsequently use credit. The CFPB’s analysis focuses on borrowers when they first pay off individual student loans. The report uses data from approximately five million credit records maintained by one of the three nationwide credit reporting companies.
The report finds that most borrowers pay off their student loan before the scheduled due date of the final payment, often with a single large final payment. The median final payment made on a student loan is over 50 times larger than the scheduled payment, which equates to a payoff almost five years early, with 94 percent of final payments exceeding the scheduled payment. In addition, most borrowers paying off a student loan early also simultaneously reduce their credit card balances and make large payments on their other student loans. These borrowers are also 31 percent more likely to take out their first mortgage loan in the year following the payoff. While this evidence shows that early student loan payoffs coincide with increased home purchases, the simultaneous reduction in consumer debt suggests that increased income is driving the decision to pay off debt and purchase homes.
Finally, most borrowers who pay off a student loan by making all of the scheduled payments pay down other debts in the months immediately following payoff rather than take on new debt. Those borrowers with additional student loans put 24 percent of the money saved towards those loans and 16 percent of the money saved toward consumer debt. Unlike borrowers paying off a student loan early, borrowers paying off on schedule are not more likely to take out a mortgage for the first time.
The CFPB report observes that because the data show that repayment of one type of debt directly affects payments and borrowing on other kinds of debt, “policies and products that change repayment terms or balances for one credit product are likely to have spillover effects on others, either enhancing the intended effects (e.g. payment relief, increased credit access) or leading to compensating shifts (e.g. reallocated payments or borrowing).”
As a result, the CFPB believes that analyzing borrower behavior across all debts can improve its understanding of consumer debt and allow it to more accurately predict the impact of new policies or products on consumers.