student debt overview

NCHER Legislative Conference September 26, 2013

Meta Brown, Federal Reserve Bank of New York

Student Debt Overview

The views presented here are those of the author and do not necessarily reflect those of the Federal Reserve Bank of New York, or the Federal Reserve System

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FRBNY’s 2013Q2 Household Debt and Credit Report was released in mid-August.

Student debt grew by $8 billion (0.8 ppt) to $994 billion.

This is a slower rate of growth than 2012Q4 – 2013Q1 (2.1 ppt), but similar to 2012Q1-2012Q2 (1.1 ppt). In general, Q1-Q2 is a slower growth period for (credit reporting of) student debt.

Overall consumer debt fell by $79 billion, or 0.7 ppt, to $11.15 trillion. (Peak $12.68 trillion)

Housing debt fell: Mortgage -$92 billion (1.1 ppt – transfer of servicing); HELOC -$12 billion (2.2 ppt)

Non-housing debt rose: SL; Credit card +$8 billion (1.2 ppt); Auto +$20 billion (2.5 ppt)

Recent Household Balance Sheet Developments

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Higher education is crucial to improving the skill level of American workers, especially given rising income and employment gaps between high school and college graduates.

With growing enrollment and rising tuition, student loans play an increasingly important role in financing higher education.

Rapid growth in the prevalence of student borrowing, and aggregate student debt balances approaching $1 trillion, have attracted attention from policymakers, the media, and the public.

We describe the historical and current situation of student debt and discuss its implications for borrowers and the economy.

Higher Education and Student Debt

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The findings discussed here are based on the FRBNY Consumer Credit Panel (CCP) – a representative sample of consumer credit data that the New York Fed acquired from Equifax.

The CCP contains borrower-level information on student loan balances and payment status, along with other types of household debt

– but no federal vs. private student loan distinction.

Details are available in Donghoon Lee’s press briefing, available via http://www.newyorkfed.org/regional/householdcredit.html

Lee, Wilbert van der Klaauw, Joelle Scally, Andrew Haughwout, and David Yun regularly update information on student loan borrowers and related household debt on our public website. http://www.newyorkfed.org/householdcredit

Data: FRBNY Consumer Credit Panel (CCP) / Equifax

http://www.newyorkfed.org/regional/householdcredit.html

http://www.newyorkfed.org/householdcredit

for internal use only

Part 1: Growth of Student Loans

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6

Total student loan balances by age groupincreasing across all age groups

2004 2005 2006 2007 2008 2009 2010 2011 20120

100

200

300

400

500

600

700

800

900

1,000

under 30 30-39 40-49 50-59 60+

33%

Billions of Dollars

17%

12%

5%

33%

Source: FRBNY Consumer Credit Panel / Equifax

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Non-mortgage balances

Student debt is the only kind of household debt that continued to rise through the Great Recession.

Now the second largest balance after mortgage debt.


0

100

200

300

400

500

600

700

800

900

1000

0

100

200

300

400

500

600

700

800

900

1000HELOC Auto Loan Student Loan Credit Card

Billions of Dollars Billions of Dollars

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Number of borrowers and average balance per person

2004

2005

2006

2007

2008

2009

2010

2011

2012

0

10

20

30

40

Number of borrowers

Mill

ions

Each increased by 70% between 2004 and 2012 (7% per year)


2004

2005

2006

2007

2008

2009

2010

2011

2012

0

5,000

10,000

15,000

20,000

25,000

Average balance per borrower

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Distribution of student loan balance, 2012:Q4

40% of borrowers have balances less than $10,0003.7% of borrowers have balances greater than $100,000

39.9%

29.8%

17.7%

9.0%

2.2% 0.9% 0.6%

$1-10,000$10,000-25,000$25,000-50,000$50,000-100,000$100,000-150,000$150,000-200,000$200,000+

Balance


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Student borrowing increasingly prevalent


2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

0

5000

10000

15000

20000

25000Student debt prevalence and mean among 25 year olds

Proportion of 25 year olds with student loans, left axis

Mean student loan debt among borrowers at 25, right axis


Part 2: Student Debt Delinquency

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6.7 million borrowers, or 17%, are 90+ days delinquent.30-49 year olds have higher delinquency rates.


age<30 age 30-49 age 50+ all0%

5%

10%

15%

20%

25%

30%

35%

40%

2004 2008 2012

Share of borrowers 90+ days delinquent (incl. default)

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not in re-

pay-ment: bal-ance the

same14%

not in repayment: balance up

30%

Borrower repayment status, 2012:Q4

About 44% of borrowers are not yet in active repayment due to deferments and forbearances.

Another way to look at the delinquency rate is to consider only those in active repayment and remove those who are not in repayment from the denominator…

in re-pay-

ment: balance delin-quent17%

in re-pay-

ment: balance

not delin-quent39%

Source: FRBNY Consumer Credit Panel / Equifax * Repayment status is defined using the quarterly change in balance and the current payment status.

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Delinquency rates higher among borrowers in repayment


age<30 age 30-49 age 50+ all ages0%

5%

10%

15%

20%

25%

30%

35%

40%

Share of borrowers in repayment 90+ days delinquent

2004 2008 2012

age<30 age 30-49 age 50+ all ages0%

5%

10%

15%

20%

25%

30%

35%

40%

Share of borrowers 90+ days delinquent

2004 2008 2012


Part 3: Subsequent Economic Activity

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Young student borrowers retreat from housing marketwith coauthor Sydnee Caldwell


2003 2004 2005 2006 2007 2008 2009 2010 2011 20120.2

0.22

0.24

0.26

0.28

0.3

0.32

0.34

0.2

0.22

0.24

0.26

0.28

0.3

0.32

0.34

Proportion with home-secured debt at age 30

Any student loan debt ages 27-30 No student loan debt ages 27-30

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Young student borrowers retreat from auto market


2003 2004 2005 2006 2007 2008 2009 2010 2011 20120.24

0.26

0.28

0.3

0.32

0.34

0.36

0.38

0.4

0.24

0.26

0.28

0.3

0.32

0.34

0.36

0.38

0.4

Proportion with auto debt at age 25


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Student borrowing increasingly prevalent


2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

0

5000

10000

15000

20000

25000Student debt prevalence and mean among 25 year olds

Proportion of 25 year olds with student loans, left axis

Mean student loan debt among borrowers at 25, right axis

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Student borrowers deleverage, despite rapid SL growth


2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

5000

10000

15000

20000

25000

30000

35000

40000

0

5000

10000

15000

20000

25000

30000

35000

40000Average total debt at age 25


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Weakened labor markets Lowers graduates’ expectations regarding future income Graduates reign in consumption

Decreased access to credit Underwriting standards tightened in the recession & recovery DTI calculations include larger student loan balances Increased SL delinquency lowers apparent creditworthiness

Consider trends in credit scores for those with and without student debt:

Why the decline in housing & auto market participation?

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Declining relative credit scores of student borrowers


2003 2004 2005 2006 2007 2008 2009 2010 2011 2012610

615

620

625

630

635

640

645

650

655

660

610

615

620

625

630

635

640

645

650

655

660

Average Equifax risk scores at 25 and 30

Age 25, student loan 22-25 Age 30, student loan 27-30Age 25, no student loan 22-25 Age 30, no student loan 27-30

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Higher education is an important investment among young workers, but it is accompanied with a growing student debt burden.

Aggregate student loan balances almost tripled between 2004 and 2012 due to an increasing number of borrowers and higher balances per borrower.

About 17% of borrowers are delinquent on student debt. Adjusting for repayment causes the delinquency rate to rise to over 30%.

Conclusion

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Young student borrowers appear to have retreated from both housing and auto markets between 2008 and 2012.

Hence, despite rapidly growing student debt balances, they lowered their overall debt from 2008 to 2012.

Lowered earning expectations, tighter underwriting standards, higher DTIs, and decreased creditworthiness may limit the contribution of these skilled young workers to housing and auto market recoveries.

While highly skilled young workers have traditionally provided a vital influx of new, affluent consumers to U.S. housing and auto markets, unprecedented student debt may dampen their influence in today’s marketplace.

Conclusion


APPENDIX

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On our website, we provide: Updates of our Quarterly Report on Household Debt &

Credit ▫ Balances for Mortgages, Credit Card, Auto, & Student Debt▫ Delinquency rates

Spreadsheets:▫ All data featured in the Quarterly Report on Household Debt &

Credit (1999-2013:q1, quarterly)▫ Student loan

– # borrowers, delinquency rates, average balance

– By state (2004-2012, annual) – By age group (2012 only)

Appendix: www.newyorkfed.org/householdcredit

student debt overview

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