Payment Pause Ends: Student Loan Expert Shares Repayment Tips

Ivanna Hampton: Here’s what’s ahead on this week’s Investing Insights. Bond yields are going in the opposite direction than many investors expected. I’ll talk with Morningstar’s chief markets editor about why bond interest rates keep rising. Plus, what parents and older borrowers should know as the student loan payment pause ends. And why some new homes are selling while existing home sales decline. This is Investing Insights.

Welcome to Investing Insights. I’m your host, Ivanna Hampton. Let’s get started with a look at the Morningstar headlines.

New-Home Sales Have Remained Resilient

New-home sales have remained resilient despite rising mortgage rates and other economic pressures. Home sales for the year through July were about even with the year-ago period compared with a more than 20% decline in existing home sales. Homebuilders can credit their relative success to a trio of factors making new homes more affordable. They’re offering sales incentives, lowering base prices, and building smaller homes. The National Association of Home Builders says a fourth of homebuilders reported lowering base prices by 6% on average. New-home sales, along with single- and multifamily starts, have topped Morningstar’s expectations. Its analyst thinks multifamily starts will slow next year as the housing market will need time to digest a record number of units. Morningstar is now projecting total housing starts to decline about 10% year over year to about 1.4 million units. That figure sits above the previous forecast of 1.3 million units.

FedEx Missed Morningstar’s Expectations

FedEx delivered a mixed earnings report in its fiscal first quarter. Sluggish global demand and increased competition pushed down revenue 7% year over year. The results missed Morningstar’s expectations. The global shipping giant blames restrained restocking within the retail sector and a decline in business from the U.S. Postal Service. However, air-based Express’ volume declines are easing and pricing at Ground still looks healthy. FedEx gained customers as rival UPS dealt with a strike threat from the Teamsters over the summer. Freight’s margin fell, but the segment should get a boost from competitor Yellow shutting down. Ground margin came in well ahead of Morningstar’s forecast, and cost cuts are gaining traction. Management expects flattish revenue in fiscal 2024, but it raised the bottom end of its earnings per share outlook by $0.50. Morningstar raised its estimate for what FedEx’s shares are worth to $231 from $222 despite the sluggish demand.

Microsoft’s Activision Blizzard Buyout

Microsoft’s planned buyout of Activision Blizzard moves one step closer to closing. The U.K.’s Competition and Markets Authority, or CMA, has given preliminary approval for the restructured deal. The new plan gives video game publisher Ubisoft control over the cloud streaming rights to Activision Blizzard games outside the EU for the next 15 years. Morningstar expects U.K. regulators to wait until the comment period closes on Oct. 6 before giving final approval. Then, it would likely come before the Oct. 18 merger deadline. The U.S. Federal Trade Commission is appealing the buyout, but an appeals court refused to block the merger in July. This paved the way for Microsoft to close the deal once it gets CMA approval. Morningstar expects that the FTC will continue to argue in court against the merger. However, it’s unlikely that the regulator will succeed based on its current strategy. Morningstar is maintaining its view that Activision Blizzard’s stock is worth $95.

Student Loan Repayments and ‘The Institute of Student Loan Advisors’

Many student loan borrowers are adding debt repayment back to their budgets. The three-year payment pause is ending, and bills are due this October. The relief started early in the pandemic to ease borrowers’ financial burden. Student loan debt extends beyond Gen Z and millennials. Parents, or those who went back to school later in life, are also saddled with debt. Betsy Mayotte is the president and founder of “The Institute of Student Loan Advisors,” and she’s sharing tips for older borrowers.

Thanks for joining me, Betsy.

Betsy Mayotte: My pleasure.

How to Prepare for Student Loan Payments

Hampton: Student loan payments are becoming part of many household budgets again. How should people prepare to work this bill, in a way, back into their monthly finances?

Mayotte: I have this unofficial checklist that all student loan borrowers that have been on the pause should go through. The first thing is make sure you know where your loans are. In addition to loans being on hold and interest being on hold for the past 3.5 years, something like 17 million accounts have changed servicers. So the first thing to do is log on to the Department of Education’s website, which is studentaid.gov, and make sure you know who your loanholder is. From there, go to that loan servicer and either log in or create an account and make sure all your contact information is up to date. Email, snail mail, phone, owl, passenger pigeon, all the preferred ways of getting communications and then make sure you’re opening all the things because you don’t want to miss any important deadlines.

While you’re on your loan servicer’s website, look at what your payment’s going to be and what payment plan you’re on, and if that’s not something that’s going to fit your budget or your long-term financial or student loan goals, now’s the time to apply for one of the lower payment or one of the different payment options that are available for federal student loans. And then the last to-do list as we gear up for October is for anybody that was on automatic payment prior to the pause or is interested in getting on automatic payment, you’re going to need to sign up for it now. For those that were on it pre-COVID, they’re not going to automatically just turn you back on; you’re going to have to apply again. And for people that aren’t familiar with the benefits of that, they give you a quarter-point discount on your interest rate if you’re signed up for automatic payments.

Younger Borrowers vs. Older Borrowers

Hampton: Well, that’s good to know. It does seem like a lot of attention focuses on younger borrowers. Why do you think older borrowers like parents or folks who go back to school tend to receive less attention?

Mayotte: I think it’s tradition. You know, back in the first couple decades of student loans, the vast majority of student-loan-holders were younger people. Most people paid their loans off within five, seven, 10 years. And policymakers and the industry and the culture itself hasn’t caught up with the fact that that’s no longer the case. People are going back to school at an older age. More parents are having to take out Parent PLUS loans or co-sign on private loans to afford to send their kids to school. And people again are taking longer to pay their loans off. The fact of the matter today—the student debt crisis is not just a young person’s issue. Half of all borrowers are over the age of 30. A quarter are over the age of 45. And the fastest-growing segment of borrowers that struggle with student loans are the over-65. So, we definitely need to change the assumptions that we make when we think about who that student loan borrower is.

Shifting Student Debt

Hampton: Now, if you’re a parent and you’re looking at your child and you’re like, “Well, this was for your college education,” how can parents shift their kids’ college debt to their kids?

Mayotte: There’s no good way to do it other than a handshake and a good relationship. You know there are people that talk to us about having the student refinance the federal Parent PLUS loan into a private loan in their own name. And I’m here to say that is a terrible idea. Refinancing a federal loan into a private loan means forever and ever losing all the federal benefits, such as lower payment options and so on, and the safety nets that can be needed if there’s a financial crisis or worse—if somebody should pass away or develop a total and permanent disability. The families that we work with—generally what we advise is to find a payment plan that will be affordable to the person who’s actually making the payments and then just make sure that that student has permission to get access to the account, which can be done in writing to the servicer, and maybe set up an email address so the student is also receiving emails about the account.

Risks of Defaulting on Federal Student Loan Debt in Retirement

Hampton: Now, you mentioned earlier that the group that is around retirement age—you know, the over-65 group—if you’re in retirement or you’re approaching retirement, what are the risks of defaulting on federal student loan debt in retirement?

Mayotte: Well, I mean, if you can’t afford or don’t make the payments, then the loans will default, and unfortunately with default, a bunch of really terrible things happen. Of course, it negatively affects your credit in a significant way, but also they can add up to 24% in collection costs to the loan balance, making the loan even more expensive than it was before. They can also garnish, if you still have some wages coming in, they can garnish those wages. They can also—and they do—garnish your Social Security as well as taking any tax refund. I always tell people that are like “Well, I’m just going to default on my loans,” that if you think you can’t afford your loans now, you’re really not going to be able to afford them once you default—because the garnishment amount is higher than what most of the income-driven plans would result in as far as a percentage of your income. So you’re much better off getting on one of the income-driven plans or one of the other plans that would make the payment affordable. The other benefit to that is these income-driven plans have a baked-in forgiveness component. So if you’re on them for 20 or 25 years and you still have a balance, they’re going to forgive the balance and that doesn’t happen when you’re in default.

The SAVE Repayment Plan

Hampton: Let’s talk about the SAVE [Repayment] Plan. The Department of Education unveiled it over the summer. Who is this plan meant for, and why should someone consider it?

Mayotte: The SAVE plan is another—we use this umbrella term of income-driven repayment plans. There’s actually five of them. There’s income-based repayment, pay as you earn, another plan that’s different but is also called “new income-based repayment,” and then income-contingent, and then the SAVE plan, which used to be called the “repay plan.” The SAVE plan is different and a lot more generous. Number one, it excludes a much higher percentage of your income from the calculation that they do to determine your payment, and number two is if your calculated payment under the SAVE plan is lower than the amount of interest you’re accruing every month, the government’s going to forgive the rest of that interest. So, if you’re on that plan, you can be confident that your balance isn’t going to go up, which is one of the negative potential aspects of the other income-driven plans—it’s possible to have a payment and still have your balance go up because your payment’s less than the interest that’s accruing.

Now as far as people close to retirement that may have loans, you need to be careful with the SAVE plan, because if the loans you have are Parent PLUS loans, those in and of themselves are not eligible for SAVE. However, there’s a loophole out there that will allow you to make the Parent PLUS loans eligible for SAVE, and I call it the “supersecret double consolidation loophole.” We have all the steps for that written out on our website on the consolidation page, but anybody who’s listening to this that are saying “Hey, that might help me,” you should know that they’re closing that loophole in July of 2025, but going through it would allow a Parent PLUS loan to be eligible for this lower-cost SAVE plan.

Hampton: And we’ll have a link to your organization’s website in the show notes. Betsy, we were talking earlier before we got on camera about thinking about student loans in a long-term sense. You have this pitch for borrowers out there, people who are paying loans back—what is it?

Mayotte: I’m trying to start a trend. You know, I’ve seen a lot of borrowers who were like, when they first get out of school, they find the lowest payment possible and they sort of set it and forget it. And that’s usually not a good strategy. Things can change, especially over five years or 10 years or 20 years. I want to see everybody getting in the habit of reevaluating their student loan strategy at tax time. Just sort of make it a thing. Just like you automatically remember to check the batteries on your smoke detector at Daylight Savings. I want everybody to automatically remember it’s time to reevaluate my student loan strategy at tax time. And I say tax time because at that point you already have most of what you need in front of you to make an informed decision about whether you should change your payment plans or maybe start paying your loans off more aggressively or pursue a forgiveness option or some other strategy.

Hampton: All right, we’ll see around tax time next year if this movement picks up. Thank you, Betsy, for your time today and explaining what people should do as their bills come due in October.

Mayotte: My pleasure.

What Rising Bond Yields Mean for Investors

Hampton: The benchmark used for many mortgages and other loans has hit a high not seen since 2007. The U.S. Treasury 10-year note is hovering around 4.5%. And some market watchers are anticipating rates will stay so-called “higher for longer.” Here is Morningstar Inc.’s Chief Markets Editor and Smart Investor newsletter editor, Tom Lauricella, to talk about that.

Thanks for joining me, Tom.

Tom Lauricella: Happy to be here.

Hampton: So, many investors expected bond yields to start falling around this time of year. Why hasn’t that happened?

Lauricella: Yeah. Among the many surprises we’ve had in the markets this year, the bond market has been a big one. Many folks had expected a recession to be taking place right now for the economy to be rolling over. And along with that, there had been expectations that interest rates would be starting to come down, that the Fed might be on the verge of lowering rates. And the bond market in particular, that yields on bonds would also be falling along with the weakening economy. That is definitely not what’s been happening. It’s been a real surprise the degree to which the opposite has been the case. And bond yields have been rising to their highest level in a long time.

Hampton: And you’ve written that there are three factors keeping bond yields higher. What are they?

Lauricella: Yeah. So, the first of three is probably the most important, and that’s the actual underlying strength of the economy. So, as I said, many people had expected us to be sliding into a recession right now. Not only is that not happening, but there are signs that the economy has even gotten stronger in the third quarter. The Atlanta Fed has a measure of current GDP growth, their estimate, and that’s approaching 5%, which would be the strongest rate of growth since the end of 2021 and more than double what we saw in the second quarter. That’s a pretty remarkable pickup in economic growth for this point in the economic cycle, and especially with the Fed having raised interest rates to such a large degree a year ago. So, the main thing is that the economy is strong, and the concern here is that that’s going to make it much harder for inflation to keep coming down toward the Fed’s 2% target. And that’s especially a case with a tight job market. We haven’t seen the job market softening up much at all. And as we’re seeing with some of this labor activity, contracts being produced that have big wage increases, the concern is that we end up with this cycle that keeps inflation from coming down. So, the economy has probably been the biggest surprise and is probably the biggest factor at play here.

Hampton: And Tom, you mentioned the economy. What about the other two factors?

Lauricella: Yeah, the second one is somewhat related to that, and that’s the Fed’s own estimates of where it’s going to be taking interest rates. People refer to that as the “Fed’s dot plot.” Essentially, what the dot plot is, is the forecast from individual Fed officials about where interest rates are expected to be next year. And what we saw at the most recent Fed meeting was that those expectations have risen. So, not only are expectations for Fed easing being put off, but in fact, it’s looking like the Fed itself doesn’t expect to take interest rates down that much. So, there’s an adjustment that takes place in the bond market. If the Fed is only going to be cutting interest rates by, say, 0.5% next year, that’s a very different story when it comes to the bond market than if the Fed was going to be cutting interest rates by 1%. Either way, the Fed was signaling, and that’s where this “higher for longer” idea comes from, the Fed is signaling that it expects to keep interest rates higher for a longer period of time.

The third one is a little bit different here, and this is one particular to the bond market, and that is the U.S. government is having to issue a lot more debt than people had expected just three, four, five months ago. And what that does is, it’s basic supply and demand. There’s a lot more supply. Demand is a little iffy right now with these concerns about the economy. And so, if the government is selling a lot more debt, then the market is going to start notching prices down to attract more buyers, and that drives yields up. And so, this is a factor that a lot of folks outside the bond market might not see, but it’s an important one than when it comes to magnifying the impact of these other fundamental factors. So, those are the three things that are really responsible for why bond yields are rising right now.

Hampton: And what’s been the impact on growth stocks?

Lauricella: The growth stocks have run into a little stretch of mud here after having a really strong race higher in the first half of the year. Growth stocks are particularly sensitive to interest-rate expectations. These were the stocks that were leading the market rebound through July. Since then, as interest rates in the bond market have crept higher and moved higher more rapidly lately, we’ve seen the air come out of that move higher for these growth stocks. That’s been a big driver of what’s led the stock market to fall back.

Hampton: And what does it mean for investors if interest rates stay higher for longer?

Lauricella: This is what I think people are still digesting. The question is, How much higher? There’s some thought that perhaps, as you mentioned at the very beginning, they could still creep higher here, especially if the economy does not cool off. And how long? And at this point, it’s still anybody’s guess. But investors are not used to this kind of environment. It’s been over 15 years since we’ve been in what some people will call a “normal” interest-rate environment from before the great financial crisis. I think for a lot of investors, it requires thinking a little bit differently than they have and understanding that all the variables that come into play with higher rates, such as what happens in the housing market, the cost of financing for companies, consumer debt generally, we’re going to be at a higher level. And a lot of the calculations that people have been making for the last decade-and-a-half might have to be tweaked.

Hampton: Thanks, Tom, for your time today.

Lauricella: Great to be here.

Hampton: That wraps up this week’s episode. Subscribe to Morningstar’s YouTube channel to see new videos from our team. You can hear market trends and analyst insights from Morningstar on your Alexa devices. Say “Play Morningstar.” Thanks to senior video producer Jake VanKersen, and lead technical producer, Scott Halver. And thank you for tuning into Investing Insights. I’m Ivanna Hampton, your host and a senior multimedia editor at Morningstar. Take care.

Read about topics from this episode.

Incentives and Speculative Building Have Boosted New-Home Sales; We Now See More Starts in 2023

FedEx Earnings: Global Package Demand Still Sluggish, but Ground Margins Impress

Activision Blizzard: Sale to Microsoft Will Likely Close in October

Student Loan Repayments Are Back. What Does That Mean for Your Financial Plan?