Household Debt and Credit: Student Debt

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1 Household Debt and Credit: Student Debt February 28, 2013 Donghoon Lee 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 and Student Debt 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. 2

3 Part 1: Growth of Student Loans for internal use only 3

4 Total student loan balances by age group increasing across all age groups Billions of Dollars 1, % 12% 17% % % under

5 Non-mortgage balances Billions of Dollars HELOC Auto Loan Student Loan Credit Card Billions of Dollars 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. 5

6 Distribution of student loan balance, 2012:Q4 2.2% 0.9% 0.6% 17.7% 9.0% 29.8% 39.9% Balance $1-10,000 $10,000-25,000 $25,000-50,000 $50, ,000 $100, ,000 $150, ,000 $200, % of borrowers have balances less than $10, % of borrowers have balances greater than $100,000 6

7 Number of borrowers and average balances per person Millions Number of borrowers Thousands of Dollars Average balance per borrower Each increased by 70% between 2004 and 2012 (7% per year) 7

8 Student borrowing increasingly prevalent 45% Share of 25 year olds with student debt 40% 35% 30% 25% 20% 15% 10% 5% 0% 2004:Q4 2005:Q4 2006:Q4 2007:Q4 2008:Q4 2009:Q4 2010:Q4 2011:Q4 2012:Q4 8

9 Summary 1: Growth of Student Debt 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 9

10 Part 2: Student Debt Delinquency for internal use only 10

11 Share of borrowers 90+ days delinquent 40% 35% 30% 25% 20% 15% 10% 5% 0% age<30 age age 50+ all million borrowers, or 17%, are 90+ days delinquent year olds have higher delinquency rates. 11

12 Borrower repayment status, 2012:Q4 About 44% of borrowers are not yet in repayment due to deferments and forbearances. not in repayment: balance up 30% in repayment: balance delinquent 17% not in repayment: balance the same 14% in repayment: balance not delinquent 39% 12

13 Delinquency rates higher among borrowers in repayment 40% Share of borrowers 90+ days delinquent 40% Share of borrowers in repayment 90+ days delinquent 35% 35% 30% 30% 25% 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% age<30 age age 50+ all ages 0% age<30 age age 50+ all ages

14 Quarterly transition rate of borrowers in repayment from current to delinquent 9% 9% 8% 8% 7% 7% 6% 6% 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% % 14

15 Summary 2: Student Debt Delinquency About 17% of borrowers are past due on their student debt more than 90 days in 2012, a large increase from under 10% in % 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%.. 15

16 Part 3: Student debt and other debts for internal use only 16

17 Non-student debt declined for all borrowers age Decline particularly pronounced for borrowers with larger student debt $60,000 Average non-student loan balances, age auto credit card mortgage heloc other $60,000 $50,000 $50,000 $40,000 $40,000 $30,000 $30,000 $20,000 $20,000 $10,000 $10,000 $0 $0 $0 $1-10K $10K-25K $25K-50K $50K-75K $75K-100K $100K+ $0 $1-10K $10K-25K $25K-50K $50K-75K $75K-100K $100K Student Debt Balance Student Debt Balance 17

18 Share borrowers age years old with new mortgage originations 18% no student debt with current 100K+ student debt with current student debt with 90+ delinquent student debt 16% 14% 12% 10% 8% 6% 4% 2% 0% 2005:Q4 2006:Q4 2007:Q4 2008:Q4 2009:Q4 2010:Q4 2011:Q4 2012:Q4 With delinquent student debt, mortgage origination is very difficult. The mortgage origination gap across the size of student debt has declined between 2005 and Note: delinquency is as of Q4 of previous year 18

19 Non-student debt 90+ days delinquent, age 25-30, 12:Q4 40% 35% 30% 25% 20% 15% 10% 5% 0% no student debt current student debt 90+ delinquent student debt auto loans credit card mortgage Delinquent student loan borrowers are very likely to be delinquent on other debt as well. 19

20 Summary 3: Student Debt and Other Debt 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. 20

21 Conclusion 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. 21

22 Reference Charts 22

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. Percent Unemployment Rate Dec-2007 Jun-2009 Jan-2013 High School Graduate Dec-2007 Jun-2009 Jan-2013 Bachelor's degree Median Dollars per Week Median Weekly Earnings, 2012:Q high school graduates bachelor's degree or higher 23

24 Distribution of Student Debt balance, 4Q:2005 Distribution of Student Debt balance, 4Q: % 1.3% 3.2% 0.4% 0.2% 2.2% 2.5% 0.9% 0.6% 11.5% 1-10K 6.5% 1-10K 10K-25K 10K-25K 25K-50K 50K-75K 17.7% 39.9% 25K-50K 50K-75K 26.8% 55.5% 75K-100K 100K-150K 150K-200K 75K-100K 100K-150K 150K-200K 200K+ 200K+ 29.8% 24

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