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Morgan Stanley Report: US Federal Student Loan Payment Resumption Analysis Summary

Event Overview: Full restart of federal student loan collections on May 5, 2025. Around 5.5 million defaulted borrowers (~$116B) and 7-9 million delinquent borrowers (~$190-250B) will begin returning payments.

• Estimated increase in monthly loan payments: $1-3B (likely$1-2B) by late 2025.

Economic Impact: Minimal Short-Term, Longer-Term Headwinds

1. Estimated GDP Impact:

   • ~0.05-0.15 pp reduction in real GDP/growth in 2025–2026 due to higher consumer spending compression and rebound in collections.
   • Middle-income consumers and younger cohorts (especially Gen X) will be most affected.

2. Treasury & Bond Markets:

   • ~$4B/month increase in Treasury revenues from loan payments.
   • This may extend the Treasury's borrowing timeline to early October.

Key Headwinds:

• Disincentive for 8M borrowers in the Saving on a Valuable Education (SAVE) program to begin repayments until 2026 (until December).
• Potential erosion of consumer credit scores for 7-9M behind-paying borrowers.
• Further suppression of domestic demand amid uncertain trade tensions.

Consumer Behaviour:

• Higher payment burdens may reduce discretionary spending (especially among younger households).
• Consumers with lower incomes/credits scores are more vulnerable to DSO increases (~28% delinquency rate vs <8%).
• AlphaWise survey: Students and personal loans are least prioritized for payment among households.

Equity Recommendations:

1. Overweight SLM (SLM.O): Beneficiary of GPO pullback from programs like Grad PLUS.
2. Equal-Weight ALLY (ALLY.N), SYF (Nasdaq)
3. Underweight BFH (Nasdaq) & SOFI (Nasdaq): Higher exposure to subprime/personal loan deterioration risk.

US Rate Strategy & Implications:

• Resumption adds tailwinds for a steeper UST curve in 2025–2026, driven by Fed policy expectations.
• Shifts Treasury’s x-date to late August–September (exceeding Feb May estimates).

Summaries by Author/Medium:

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