Empowering Debt-Burdened Members
How Credit Unions Can Support and Assist with Student Loan Repayment
The recent Supreme Court ruling has brought an end to the more than three-year pause on student loan payments, leaving over 43 million Americans obligated to resume making payments.
Most borrowers were hopeful about some form of student debt relief, according to a recent survey. Consequently, more than a third of them say have already spent the money they believed would be forgiven.
Regardless of whether credit unions offer or service student loans, this presents a challenge for financial institutions nationwide. Payment notices are being sent out and borrowers are seeking guidance on how to navigate the transition back into loan repayment.
The potential financial strain on borrowers, particularly those living paycheck-to-paycheck, could lead to delinquencies and negatively impact credit unions' loan portfolios and deposit growth strategies – a priority for financial institutions, according to a new report.
In fact, more than 60% of American households are currently one missed payment away from a disaster. Even for borrowers that do not become delinquent, this may limit credit unions’ abilities to grow deposits and acquire new members.
Credit unions, however, are uniquely positioned to provide the needed support of debt-burdened members. Here’s how:
Education is Key
One crucial aspect of helping borrowers is providing them with education and resources to navigate their student loan repayment journey. By summarizing and disseminating relevant information, credit unions can help borrowers make informed decisions about their loans.
As examples, credit unions should advise borrowers to know who their loan servicer is and ensure their servicer has their updated contact information. This is especially critical as scams arise from fraudsters claiming to be legitimate servicers.
Credit unions can also provide helpful resources for comparing repayment plans or information on loan forgiveness programs like Public Service Loan Forgiveness, Teacher Loan Forgiveness, as well as options for healthcare professionals, military service members and volunteers.
Members may also benefit from loan consolidation but should be made aware that this doesn’t lower interest rates. Refinancing may also be an option for both federal and private loans, potentially lowering interest rates and allowing for a new repayment term. However, refinancing federal loans will make them private, forfeiting federal benefits.
For borrowers with loans in default before the emergency forbearance. Programs like the Education Department's Fresh Start Program can restore them to good standing. This program removes the default from a borrower’s credit report and restores access to federal financial aid.
Automating Payments for Efficient Loan Repayment
While advice is helpful, borrowers also need a concrete plan of action. Automating payments can be an effective strategy to streamline the repayment process.
Credit unions can guide members towards a reliable and convenient solution for automatic payments, allowing borrowers to pay off loans more efficiently and potentially save on interest rates.
Making extra payments can also help borrowers accelerate repayment and save on interest charges. However, credit unions should make members aware to inform their loan servicer to apply the extra payment to the principal balance rather than future payments or interest charges.
Improving Credit Scores and Building Wealth
Credit unions should also educate members on the long-term benefits of automation and additional payments. Automation not only ensures timely payments but also has the potential to boost credit scores and help members build wealth. Monthly loan payments alone can negatively impact credit scores.
By scheduling loan payments to coincide with borrowers' paydays, credit unions can help accelerate payments towards the principal and eliminate the shock of a large monthly payment. This approach not only assists borrowers in meeting their loan obligations with less struggle but also reduces the likelihood of defaulting on a loan, paying late fees and potentially shortens the loan repayment period by years.
By actively supporting borrowers in managing their loan payments, credit unions contribute to the growth of generational wealth, enabling members to save thousands of dollars in interest over the life of the loan.
Tech Solutions for Financial Wellbeing
In today's challenging economic climate, borrowers continue to seek out cutting-edge technology solutions that offer flexible payment strategies to alleviate stress and simplify budgeting. With millions of Americans facing an additional monthly payment, credit unions are in a unique position to provide the necessary support.
By leveraging innovative financial technology, credit unions can offer convenient and user-friendly platforms that empower members to manage their loan payments effectively.
As student loan payments resume for millions of borrowers, credit unions have an opportunity to support and empower their debt-burdened members. By providing education, summarizing relevant resources, and offering automated payment options, credit unions can alleviate financial stress, improve credit scores, and help members build generational wealth. In addition to navigating these challenging times with their members, credit unions can both foster long-term loyalty and ensure their own success.
Nadim Homsany, Co-Founder & CEO of EarnUp