Dive Brief:

  • Buy now, pay later provider Affirm expects the upcoming resumption of student loan payments to be a “modest headwind” to its business, Affirm CEO Max Levchin said Thursday.
  • “We don’t think it’s nothing; we don’t think it’s very significant either,” Levchin told analysts during the company’s fiscal fourth-quarter earnings call last week. San Francisco-based Affirm noted in its quarterly shareholder letter that it’s incorporating consumers’ student loan balances into underwriting decisions.
  • Federal student loan payments have been paused since March 2020, at the onset of the COVID-19 pandemic. Some payments are set to resume Oct. 1, and interest will kick in again Friday, The Wall Street Journal reported.

Dive Insight:

Affirm views the student loan payment restart as a mild handicap to its fiscal year 2024 gross merchandise volume, the shareholder letter said. The company’s GMV in fiscal year 2023, which ended June 30, jumped 30% over the previous year, to $20.2 billion, according to Affirm’s annual filing with the Securities and Exchange Commission. 

Student loan borrowers owe a collective $1.77 trillion on federal and private student loans, online lender LendingTree said this month. The Consumer Financial Protection Bureau estimates about 20% of borrowers face multiple risk factors that indicate they may struggle when payments resume, according to a June blog post

The effect the resumption of student loan payments could have on the BNPL industry has been “a key controversy,” according to a Mizuho Securities research note issued Aug. 15. That’s because consumers who owe money to BNPL providers will now face a bigger debt burden, raising questions about credit exposure for the BNPL companies.

BNPL services allow consumers to spread out payments for a purchase, sometimes over a period of weeks with no interest, or over a period of months with interest. 

In polling about 300 active BNPL users who have tapped BNPL providers Affirm, Afterpay, Klarna or PayPal for installment payment plans, Mizuho analysts discovered about half of those users have student loan debt. That obligation may equate to an additional annual expenditure of about $3,000, or about 4% of those users’ average household incomes, the analysts said.

Mizuho analysts estimated the student loan payments resumption to be about a 2% headwind to the industry’s volume growth.

Levchin didn’t dispute the Mizuho report’s findings. “Directionally, we’re in agreement with what they found,” he said during the Affirm earnings call.

The survey, fielded Aug. 14, revealed those saddled with student loan debt tend to have higher incomes compared to those who don’t, Mizuho analysts noted. The average income of active BNPL users with student loans was about $10,000 higher than those without loans. 

That’s viewed as “a potential positive” for BNPL providers, as those higher incomes may shield customers from credit issues, analysts wrote.

However, BNPL users who have student loan debt tend to use more BNPL services or apps than those who aren’t repaying student loans, which could be a risk, the analysts said.

Given the short-term nature of many BNPL plans, it’s unlikely a customer will be caught off guard and unable to pay over a six-week period, a Sezzle spokesperson said in June and reiterated this week.

“What we think is more likely is that the customer will be less likely to make a new purchase of goods,” the Sezzle spokesperson said in an email previously. “Their spending will slow as they have to divert their purchasing power to repayments on their loans.”

A PayPal spokesperson pointed to this recent statement: “We continue to be pleased with the quality and diversification of our credit portfolio and are closely monitoring the macroeconomic environment while making appropriate adjustments to ensure we continue to perform within our internal risk appetite,” Chief Financial Officer Gabrielle Rabinovitch said during the company’s first-quarter earnings call with analysts.

A spokesperson for Klarna declined to comment on whether the company expects an impact from student loan payments resuming. A spokesperson for Block, which owns Afterpay, didn’t immediately respond to requests for comment.

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