Student Loans Come Due

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Just as the Federal Reserve raises rates and inflation hits a 40-year high, Americans with federal student loan debt will start making payments on the debt after a two-year pause. On Aug. 31, the Department of Education will require 41 million people with student loans to begin paying again. 

According to the Federal Reserve, about one in five Americans have federal student loan debt and they saved $5 billion per month from the forbearance. It’s safe to say that a lot of people are going to struggle to restart those payments again and some of them work for banks.

The good news is that there are new employee programs that can help. One CARES Act provision allowed companies to pay up to $5,250 toward an employee’s student loans without a negative tax hit for the employee. Ally Financial, Fidelity Investments, SoFi Technologies, and First Republic Bank are a few of the many financial companies offering this benefit to employees. First Republic launched its program in 2016, after its purchase of the fintech Gradifi, which helps employers repay their employees’ loans. These programs typically pay between $100 and $200 a month on an employee’s loans, and usually have a cap.

The 2020 Bank Director Compensation Survey shows that 29% of financial institutions offered student loan repayment assistance to some or all employees. Many of those programs discontinued when the student forgiveness program started. In the anticipation of government forbearance coming to a close, now is a good time to think about restarting your program or even developing one. 

Americans now hold $1.59 trillion in student loan debt, according to the Federal Reserve. How did we get here? College got more expensive— much more expensive. 

Earlier this summer, the Federal Reserve and Aspen Institute had a joint summit to discuss household debt and its chilling effect on wealth building. The average cost of college tuition and fees at public 4-year institutions has risen 179.2% over the last 20 years for an average annual increase of 9.0%, according to EducationData.org.

At the same time, wages have not shown much inflation-adjusted growth. ProPublica found in 2018 that the real average wage of workers, after accounting for inflation, has about the same purchasing power it did 40 years ago. And inflation in 2022 has far outpaced wage increases. Some economists speculate that any pandemic-era wage increases are effectively nullified by this rapid inflation.

Not all borrowers are equally impacted. Sixteen percent of graduates will have a debt-to-income ratio of over 20% from their student loans alone, according to the website lendedu.com, while another 28% will have a DTI of over 15%. The 44% of graduates with that level of debt exiting school will face a steep climb to meaningful wealth building. The students that didn’t graduate will have an even harder climb.

Those graduates who struggle with their student loans will be less likely to buy a home or more likely to delay home ownership. They will be less likely to take on business debt or save for retirement. Housing prices have risen in tandem with education prices. The “starter home” of generations past has become unattainable to many millennial and Gen Z debt holders.

More than half of borrowers owe $20,000 or less. Seven percent of people with federal debt owe more than $100,000, according to The Washington Post. Economists at the Federal Reserve say borrowers with the least amount of debt often have difficulty repaying their loans, especially if they didn’t finish their degree. Conversely, people with the highest loan balances are often current on their payments. It’s likely that people with higher loan debt generally have higher education levels and incomes.

The Aspen Institute published a book known as “The Future of Building Wealth: Brief Essays on the Best Ideas to Build Wealth — for Everyone,” in conjunction with the Federal Reserve Bank of St. Louis. It illuminates long-term solutions for financial planning, focusing on policies and programs that could be applied at a national scale. 

In the absence of these national solutions, some employers are taking the matter into their own hands with company policies designed to help employees with student debt. Those banks are making a difference for their own employees and are part of the solution. 

BOLI Market to Remain Steady in 2018

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BOLI-12-6-17.pngAs 2017 comes to a close, bank-owned life insurance (BOLI) continues to be an attractive investment alternative for banks, based on the increasing percentage of banks holding BOLI assets and the high retention rate of existing BOLI plans. Through the first half of 2017, BOLI carriers reported receiving almost $1.4 billion in new BOLI premiums, according to the market research firm IBIS Associates. Assuming an annualized production level of $2.8 billion, this is only slightly behind the actual full-year new premium results of $3.2 billion received in 2016.

In 2016, 91 percent of new premiums were invested in general account products, and through mid-year 2017, the results were very similar, with 84 percent of new BOLI premiums going to that product type. Cash surrender value of BOLI policies held by banks stood at $164.5 billion as of June 30, 2017, reflecting a 3.5 percent increase from $159 billion as of June 30, 2016, according to the Equias Alliance/Michael White Bank-Owned Life Insurance (BOLI) Holdings Report™. Further, the percentage of banks holding BOLI assets increased in that time period, from 61.3 percent to 62.8 percent. With that in mind, what can we expect of the BOLI market in 2018, given today’s economic and legislative landscape?

Impact of the Economy on BOLI in 2018
Overall, the economy generated some very positive results in 2017. Unemployment declined to just over 4 percent, the stock market hit several new highs, and wage growth increased, albeit slightly. However, banks and other financial institutions continue to operate in a low interest rate environment with no significant market change expected in 2018, based on a November 2017 informal survey that Equias conducted of major BOLI carriers.

To understand the impact of continued low interest rates on BOLI carriers offering fixed-income products, it is important to understand the carriers’ investment philosophies and portfolio compositions. The investment objective of most carriers is to build a diversified portfolio of securities with a long-term orientation that optimizes yield within a defined set of risk parameters. The portfolio strategy often targets investment-grade securities. Corporate bonds are usually the largest holding in the portfolio, along with commercial mortgages and mortgage backed securities, private placements, government and municipal bonds, a small percentage of junk bonds, and other holdings. Some of the carriers in our informal survey stressed they will be allocating more of the portfolio to higher quality bonds in 2018 to guard against any potential downturn in the economy in 2019 or 2020.

Continued low market interest rates will somewhat affect the credited interest rates offered by carriers on both new BOLI sales as well as existing BOLI policies. Credited interest rates and net yields (defined as the credited interest rate less the cost of insurance charges) on new BOLI purchases are currently expected to remain stable in 2018. As a result, new BOLI purchases are, once again, expected to be in the $3 billion to $3.5 billion range in 2018. We also anticipate that approximately 80 to 90 percent of new premiums will be directed to general accounts with higher interest rates.

For existing general account and hybrid separate account BOLI policies, credited interest rates are likely to remain level or decrease slightly, unless market interest rates begin to rise at a faster clip than we have seen in recent years.

Impact of Federal Legislation on BOLI in 2018
One of the key proposals under the Tax Cuts and Jobs Act, passed recently by both houses of Congress, is to reduce the corporate tax rate from 35 to 20 percent. If this were to occur, the taxable equivalent yields on BOLI policies would be slightly lower. For instance, if the net yield on a new BOLI policy was 3.5 percent, then the taxable equivalent yield on that policy would be 5.38 percent at the current federal tax rate of 35 percent, due to the favorable tax treatment that life insurance policies receive.

With the lower federal corporate tax rate under the proposed legislation, the tax equivalent yield for a 3.5 percent net yield BOLI policy would be reduced to a still attractive 4.38 percent. If the corporate tax rate ends up at 25 percent, as some predict, the tax equivalent yield would be 4.67 percent.

Looking ahead to 2018, the continuation of low interest rates and a possible reduction in the corporate tax rate may have some minor impact on BOLI sales and existing BOLI policies, but neither should result in any material impact on the BOLI market.