Student loan repayment resumption could hit banks the hardest

Student loan repayments have officially resumed for a majority of borrowers this month. One concerning factor that’s arisen is the amount of money that will be leaving banks to repay these loans. Payitoff CEO Bobby Matson joins Yahoo Finance to discuss how we got here and the impact student loans will have on the banking sector.

"Regional banks and community banks, specifically, may be hit hard around the communities that they're serving," Matson points out.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

RACHELLE AKUFFO: Well kicking off this week, student loans are back. Loan payments paused in 2020 then began accruing interest again last month. And now, $1.7 trillion in payments are due.

Now, the moratorium expired Sunday, and millions of people will have to pay an average of about $500 a month for the loans. But what does this mean for the billions of dollars leaving banks to pay these loans? Bobby Matson, Payitoff CEO joins me now to discuss.

Good to have you on the show here, Bobby. So first, give us an idea. Some of the numbers that we're seeing here about how much banks could be on the hook for as they're sort of caught on the back foot from these student loan repayments kicking back in.

BOBBY MATSON: Yes, exactly. And thank you for having me, Rachelle. Appreciate it. Yeah, so it's going to be a big deal to think about up to $18 billion a month heading to student loan accounts this month. In a year, we're looking at $216 billion.

If everyone was to make those payments, it would be coming from some bank account, sort of, as you mentioned, the back end of this. And one of the things we're trying to bring the light to is that these are really massive figures at a time when deposits are at a premium, and deposit growth is on the minds for the banking sector. Another, you know, important point here is that regional banks and community banks specifically may be hit hard around the communities that they're serving, where student debt may be a more higher priority debt in that region.

RACHELLE AKUFFO: And, Bobby, I mean, it's hard to fathom that a lot of these banks and consumer lending companies didn't foresee that at some point, some of this student loan debt was going to be repaid. Was this just about being reliant on the Biden administration dismissing all of this, or, like, why was there not more foresight into this to have banks be in this position right now?

BOBBY MATSON: Yeah, I think it was a lot of things. There were so many different-- I mean, this pause was extended over nine times. So, you know, the pause itself had a lot of uncertainty around when payments would actually resume.

And so there's been a lot of dress rehearsals, you know, for this event to occur. But now that it has, the realities will start to set in, especially in Q4 here, around, what does this mean for the banking sector? What does this mean for consumer lending for anybody who's lent to these borrowers whose payments were $0 over the past 3 and 1/2 years?

These are all things that now need to be taken into consideration because forgiveness was blocked, widespread forgiveness, by the Supreme Court. And really, everyone that we've seen who's really been paying attention to this debt, it really started around that decision in June. So, you know, July until this moment, we have seen a big wave of banks and lenders, you know, waking up to this reality, realizing that there needs to be more tooling and better opportunities for borrowers and their consumers to have clarity on this really, really complex debt.

So it's really just the nature of the uncertainty and the regulatory environment. But now that we know what's happening, payments are due for the vast majority of borrowers, you know, I think now's the time for tools to be in place and for the right clarity so that borrowers can make the best decisions and be on the optimal repayment strategy.