Student loan delinquencies jump, personal loans, buy-now-pay-later next in line

A Morgan Stanley report indicates that 41% of student loan borrowers have missed payments since October, with a significant portion citing inability to pay. This delinquency is expected to pressure other consumer debt sectors, particularly buy-now-pay-later and personal loans, due to student borrowers' higher likelihood of missing payments on other debts. Lower-income borrowers are disproportionately affected, and the resumption of student loan payments is also anticipated to dampen consumer spending, especially among delinquent borrowers with lower savings.

Analysis

A Morgan Stanley report highlights emerging stress in the U.S. consumer debt market, revealing that 41% of student loan borrowers with payments due have missed at least one payment since October. This delinquency is primarily attributed to an inability to pay, as stated by 56% of these borrowers, and is disproportionately affecting lower-income individuals, with a 63% delinquency rate among those earning less than $50,000. Morgan Stanley economists warn of a significant spillover risk, anticipating that student loan delinquencies will pressure other forms of consumer credit, particularly buy-now-pay-later (BNPL) and personal loans, where student borrowers have notable exposure. While the overall student loan delinquency rate is expected to decrease from the current 41%, it is projected to remain considerably above the pre-pandemic level of 16%. Furthermore, the resumption of student loan payments is anticipated to dampen consumer spending, especially among delinquent borrowers who possess significantly lower average savings (2.1-2.6 months) compared to all student loan holders (3.9 months) and the general survey population (5.1 months), signaling reduced discretionary purchasing power.

Key Decisions for Investors

• Investors should carefully assess exposure to companies in the buy-now-pay-later and unsecured personal loan sectors, given the heightened risk of delinquencies spilling over from student loan borrowers.
• Consider a more defensive stance on consumer discretionary stocks, particularly those reliant on spending from lower and middle-income demographics, who are most impacted by student loan repayments and possess lower savings.
• Monitor upcoming consumer credit reports, delinquency statistics across various debt categories, and retail sales figures for indications of the broader economic impact and the extent of financial strain on households.