Student loans make up an increasing share of the debt held by borrowers around the country, particularly for younger borrowers. Our previous research has shown that borrowers vary greatly in their ability to pay off their loans, how quickly they can do so, and the potential hurdles they face. Today, we released a new Data Point report providing a closer look at borrowers’ use of credit as they approach and make their final student loan payments, and in the months that follow.
Looking at how borrowers pay off their student loans helps us understand how households manage their finances over time. The patterns we see highlight the interconnected nature of borrowers’ finances, as repayment of one type of debt affects payments and borrowing on other types of debt. This research can help us better predict the impacts new policies or products may have on homeownership, credit card use, and the broader economy as a whole.
As background, the typical student loan has a term of ten years, with equal monthly scheduled payments. However, borrowers can pay the loan off early at any time by using savings, gifts, or other resources, or by refinancing with a new loan. Our analyses focus on how borrowers first pay off a student loan and what happens next.
Key findings include:
Taken together, this new research suggests that when borrowers approach their final student loan payments most prefer to, and are able to, pay off the loans in full with a single large payment. The timing of this payment coincides with a broader reduction in existing debts and is followed by increases in home purchases. 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.
Understanding why so many borrowers use large lump sum payments, rather than gradual increases in monthly payments to pay off student loans, could help us better predict how the student loan market evolves as a whole, and warrants additional research. Our new findings suggest that the timing of many student loan payoffs may be determined by life events such as household formation or jumps in income or wealth, though transaction costs, rules of thumb, or inertia may also play a role.
Finally, while this analysis focuses on student loan borrowers who are successfully paying off their loans, 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.
This article by was distributed by the Personal Finance Syndication Network.
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