There's another looming cliff — the end of the student-loan repayment moratorium

By Steve Goldstein

Critical news for the U.S. trading day

Is the banking crisis over? Well, famous last words and all that, but in the early hours of Monday things are looking better: no bank collapsed over the weekend, SVB has a new owner, and even Deutsche Bank shares are trading higher.

Or maybe not. There's still the issue of commercial property, which accounts for 40% of all loans made by banks outside the top 25 by assets, according to Capital Economics.

"In a worst case scenario it's possible that a 'doom loop' develops between smaller banks and commercial property, in which concerns about the health of these banks leads to deposit flight, which causes banks to call in commercial real estate loans, which then accelerates a downturn in a sector that forms a key part of its asset base, which intensifies concerns about the health of the banks and thus completes the vicious cycle," the firm warns.

And Thomas Simons, money market economist at Jefferies, says there's another worry on the horizon: the looming end of the student loan repayment moratorium.

Student loan payments will have to resume by the end of August, or possibly earlier depending on a Supreme Court decision, meaning 45 million people will have to start paying loans again.

Related: SoFi CEO Anthony Noto on suing over student-loan payment pause: 'I'm also protecting our shareholders'

Citing New York Fed data, he says the average student loan payment for a borrower not in deferment was $393 per month -- about 1% of spending, depending on which metric is used. "This may sound like a modest hit, but the impact on income is very similar to the tax increases associated with 'The Fiscal Cliff' of 2013, which was followed by a noticeable slowdown in consumption," he says.

Granted, pandemic savings have acted as a buffer for inflation. But roughly half of that is now gone, and those savings were concentrated in wealthier households anyway. "Households still have roughly half of the excess savings from the pandemic sitting on their balance sheets, but there is less cushion to absorb a substantial increase in outlays.," he says.

Student loan delinquency rates are basically zero at the moment -- how can you be late when you don't have to make payments -- but those for autos, mortages and credit cards have picked up lately.

"The strain imposed on household balance sheets by the resumption of student loan payments could cause demand for loans to pick up, but only from borrowers who are having a harder time servicing their debt," he says.

"Declining loan demand was already a profitability risk for small and regional banks prior to the recent emergence of stress and deposit flight. Risks have clearly increased over the last month, and they will increase further as household credit quality deteriorates," he concludes.

Simons didn't even mention that the student-loan cliff coincides with another worry, the looming debt-ceiling issue. The Bipartisan Policy Center last month said the day when the federal government can no longer meet all its obligations will likely arrive in summer or early fall.

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-Steve Goldstein

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03-28-23 0757ET

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