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February 28, 2013 Donghoon Lee
Household Debt and Credit: Student Debt
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
2
Higher education is crucial to improving the skill level of American workers, especially in the face of a rising income and employment gap across workers with varying education levels.
Due to increasing enrollment and the rising cost of higher education, student loans play an increasingly important role in financing higher education.
However, the rapidly increasing burden of student debt, approaching $1 trillion now, including both federal and private student loans with very different characteristics.
We present new analysis on the historical and current situation
of student debt and discuss its implication on the borrowers and the economy.
Higher Education and Student Debt
for internal use only
Part 1: Growth of Student Loans
3
4
Total student loan balances by age group increasing across all age groups
0
100
200
300
400
500
600
700
800
900
1,000
2004 2005 2006 2007 2008 2009 2010 2011 2012under 30 30-39 40-49 50-59 60+
33%
Billions of Dollars
17%
12%
5%
33%
Source: FRBNY Consumer Credit Panel / Equifax
5
Non-mortgage balances
Student debt is the only kind of household debt that continued to rise through the Great Recession and has now the second largest balance after mortgage debt.
Source: FRBNY Consumer Credit Panel / Equifax
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
6
Distribution of student loan balance, 2012:Q4
40% of borrowers have balances less than $10,000 3.7% 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
Source: FRBNY Consumer Credit Panel / Equifax
7
Number of borrowers and average balances per person
0
10
20
30
40
Mill
ions
Number of borrowers
Each increased by 70% between 2004 and 2012 (7% per year)
Source: FRBNY Consumer Credit Panel / Equifax
0
5
10
15
20
25
Thou
sand
s of
Dol
lars
Average balance per borrower
8
Student borrowing increasingly prevalent
Source: FRBNY Consumer Credit Panel / Equifax
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2004:Q4 2005:Q4 2006:Q4 2007:Q4 2008:Q4 2009:Q4 2010:Q4 2011:Q4 2012:Q4
Share of 25 year olds with student debt
9
Student Debt almost tripled between 2004 and 2012 and stands at $966B as of 2012:Q4 70% Increase in the number of borrowers 70% increase average balance per person
Reasons for the growth in borrowers and per-person debt: More people attend college and graduate school Parents take out student loans for their children Students stay longer in college and more often attend
graduate school Lower repayment rates as borrowers delay payments
through deferments and forbearances Discharging student debt is very difficult and the balance
stays with the borrower
Summary 1: Growth of Student Debt
for internal use only
Part 2: Student Debt Delinquency
10
11
Share of borrowers 90+ days delinquent
6.7 million borrowers, or 17%, are 90+ days delinquent. 30-49 year olds have higher delinquency rates.
Source: FRBNY Consumer Credit Panel / Equifax
0%
5%
10%
15%
20%
25%
30%
35%
40%
age<30 age 30-49 age 50+ all
2004 2008 2012
12
not in repayment: balance the
same 14%
not in repayment: balance up
30%
Borrower repayment status, 2012:Q4
About 44% of borrowers are not yet in repayment due to deferments and forbearances.
in repayment:
balance delinquent
17%
in repayment: balance not delinquent
39%
Source: FRBNY Consumer Credit Panel / Equifax
13
Delinquency rates higher among borrowers in repayment
Source: FRBNY Consumer Credit Panel / Equifax
0%
5%
10%
15%
20%
25%
30%
35%
40%
age<30 age 30-49 age 50+ all ages
Share of borrowers in repayment 90+ days delinquent
2004 2008 2012
0%
5%
10%
15%
20%
25%
30%
35%
40%
age<30 age 30-49 age 50+ all ages
Share of borrowers 90+ days delinquent
2004 2008 2012
14
Quarterly transition rate of borrowers in repayment from current to delinquent
Source: FRBNY Consumer Credit Panel / Equifax
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2005 2006 2007 2008 2009 2010 2011 2012
15
About 17% of borrowers are past due on their student debt more than 90 days in 2012, a large increase from under 10% in 2004
44% of borrowers are not yet in repayment, and excluding those, the effective 90+ delinquency rate rises to more than 30%.
The transition rate of borrowers in repayment from current to delinquent has been rising since 2008 from around 6% to nearly 9%.
.
Summary 2: Student Debt Delinquency
for internal use only
Part 3: Student debt and other debts
16
17
Non-student debt declined for all borrowers age 25-30 Decline particularly pronounced for borrowers with larger student debt
Source: FRBNY Consumer Credit Panel / Equifax
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000$0
$1-1
0K
$10K
-25K
$25K
-50K
$50K
-75K
$75K
-100
K
$100
K+ $0
$1-1
0K
$10K
-25K
$25K
-50K
$50K
-75K
$75K
-100
K
$100
K+
2005 Student Debt Balance 2012 Student Debt Balance
Average non-student loan balances, age 25-30
auto credit card mortgage heloc other
2005 Student Debt Balance 2012 Student Debt Balance
18
Share borrowers age 25-30 years old with new mortgage originations
Note: delinquency is as of Q4 of previous year
With delinquent student debt, mortgage origination is very difficult. The mortgage origination gap across the size of student debt has declined between 2005 and 2012.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2005:Q4 2006:Q4 2007:Q4 2008:Q4 2009:Q4 2010:Q4 2011:Q4 2012:Q4
no student debt with current student debtwith current 100K+ student debt with 90+ delinquent student debt
19
Non-student debt 90+ days delinquent, age 25-30, 12:Q4
Delinquent student loan borrowers are very likely to be delinquent on other debt as well.
Source: FRBNY Consumer Credit Panel / Equifax
0%
5%
10%
15%
20%
25%
30%
35%
40%
no student debt current student debt 90+ delinquent student debt
auto loans credit card mortgage
20
Young borrowers reduced their debt from 2005 to 2012, but the reductions were more pronounced among borrowers with high student loan balances, likely reflecting declines in demand and access to credit.
High levels of student debt delinquency reduces young borrowers’ ability to secure other types of credit.
Student loan delinquency is also associated with higher delinquency rates on other types of debt.
Summary 3: Student Debt and Other Debt
21
Higher education is an important investment among young workers for better jobs and higher income, but it is accompanied with a growing student debt burden.
Total student loan balances almost tripled between 2004 and 2012 due to increasing numbers of borrowers and higher balances per person.
Nearly one third of the borrowers in repayment are delinquent on student debt.
The higher burden of student loans and higher delinquencies may affect borrowers’ access to other types of credit and the performance of other debt.
Conclusion
22
Reference Charts
23
Why borrow for education?
College graduates have lower unemployment rates, fare better during recessions, and enjoy wages roughly double those of high school graduates.
0
200
400
600
800
1000
1200
high schoolgraduates
bachelor's degreeor higher
Med
ian
Dol
lars
per
Wee
k
Median Weekly Earnings, 2012:Q4
Dec-2007
Dec-2007
Jun-2009
Jun-2009
Jan-2013
Jan-2013
0123456789
10
High SchoolGraduate
Bachelor's degree
Perc
ent
Unemployment Rate
Source: FRBNY Consumer Credit Panel / Equifax
24
39.9%
29.8%
17.7%
6.5%
2.5% 2.2%
0.9%
0.6%
Distribution of Student Debt balance, 4Q:2012
1-10K
10K-25K
25K-50K
50K-75K
75K-100K
100K-150K
150K-200K
200K+
55.5% 26.8%
11.5%
3.2%
1.3% 1.1%
0.4% 0.2%
Distribution of Student Debt balance, 4Q:2005
1-10K
10K-25K
25K-50K
50K-75K
75K-100K
100K-150K
150K-200K
200K+
Source: FRBNY Consumer Credit Panel / Equifax