Back on March 11th, I wrote The Coronavirus Might Just Kill Your Finances Before It Kills Anyone You Know. Each day that passes raises my concerns the financial impact from the coronavirus is going to be very painful.
As I write this, consumers are being propped up with temporary economic bandages of extended unemployment benefits and payment holidays or forbearances on a mortgage, credit card, or student loan payments. Evictions and foreclosures are on hold as well.
But at some point, those legal protections from creditors are going to end.
If you just look at the headlines you’ll read things like household debt is down and credit card balances have shown the sharpest decline in the history of the FederalReserve data tracking. That seems like a good thing. But our economy runs and hums on people buying stuff and spending money. We are called consumers because the role of the individual is to consume.
The smart people at the Federal Reserve observed “American households have dialed back consumption and reduced their credit card balances, while forbearances have provided relief to many borrowers who need it. These consumer protections have helped prevent large-scale spikes in delinquency of American household borrowers, while at the same time masking the economic hardship that many households are experiencing following job loss. How households fare going forward will depend on the evolution of the pandemic and labor market, as well as on the extent and nature of future forbearance provisions and other government assistance.”
In all of that, the word that concerns me the most is masking.
Let’s just take student loans for a moment. One headline you might read is that student loan late or missed payments are dropping. That sounds like a positive note but the reality is that the real status of those loans is being masked by temporary payment requirements. You can’t be late on a payment that is not due.
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As the Federal Reserve says, “The treatment on credit reports of delinquent federal student loans in forbearance has been different than forbearances of other loan types. Most delinquent loans (but not in default) are now being reported as current; defaulted loans have retained their status, although collections are paused.”
But let’s dive deeper into the current student loan situation. Again from the Federal Reserve,”A smaller share of student loan borrowers are actively reducing their balances. And as interest on student loans is waived, a smaller share of borrowers are seeing an increase in balances. The growing gold segments indicate that with interest waived and payments deferred, the majority of borrowers saw no change in balances from May to June.”
When student loan payments become required again on September 30, will people be able to return to affording them or finding a place for them in a tight budget?
As it stands now, “We find that approximately 88 percent of student loan borrowers (which includes private loan and Federal Family Education Loan borrowers) had a scheduled payment of $0. Not all of these borrowers are in new forbearances, thus the 88 percent includes currently enrolled students, those in grace periods, as well as some borrowers in income-driven repayment programs with no payment due.”
Nobody has an actual glimpse into the future and most people are not going to listen to concerns. But that’s because they are just trying to deal with reality today.
All I can tell you is I’m scared what the financial future is going to bring.