Student Loan Borrowing and Repayment Trends, 2015 April 16, 2015 Andrew Haughwout, Donghoon Lee, Joelle Scally, Wilbert van der Klaauw The views presented here are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of New York, or the Federal Reserve System.
Some higher education background College remains a worthwhile investment for most of those who pursue it Median annual earnings were $23,000 higher for bachelor s degree holders compared to high school graduates in 2014 Unemployment rates for bachelor s degree holders much lower than high school graduates (6% vs 3.5% in 2014) Student loans are an important tool for financing college for many students Speech by William C. Dudley, March 4 on student loans:...[t]here is much uncertainty and heterogeneity in outcomes, with net returns to these human capital investments being negative for some. Understanding causes and consequences of this heterogeneity is important. How we finance post-secondary education has significant effects on a variety of critical economic outcomes. 2
Researching student borrowing We try to better understand student loans for two reasons: Student debt is large, and appears to have significant effects on macroeconomic outcomes (household formation, homeownership, consumption) Good information on borrowing and repayment is necessary to design best policies for financing this most important kind of investment 3
Student loans defy business cycle Billions of Dollars 1200 1100 1000 900 800 700 600 500 400 300 200 100 0 Non - mortgage balances HELOC Auto Loan Student Loan Credit Card Billions of Dollars 1200 1100 1000 900 800 700 600 500 400 300 200 100 0 Source: New York Fed Consumer Credit Panel / Equifax 4
Student loans increased as other debts declined During and after the Great Recession, households reduced their other debts, but student loan balances continued to increase Because the majority of student loans are federal, tight bank lending standards did not affect student loans The increase was a result of both increasing numbers of borrowers and increasing average balances per borrower Between 2004 and 2014, there was an 89% increase in the number of borrowers and a 77% increase in the average balance size College enrollment grew by 20% between 2005 and 2010 faster than any period since the 1970 s and has declined slightly since 5
Total student loan balances by age group Billions of Dollars 1,200 under 30 30-39 40-49 50-59 60+ 5% 1,000 12% 800 18% 600 33% 400 200 2% 9% 14% 33% 32% 42% 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: New York Fed Consumer Credit Panel / Equifax 6
Increases among borrowers of all ages Student loan balances grew for borrowers of all ages between 2004 and 2014: The number of borrowers over 40 increased at twice the pace of the number of borrowers under 40 Especially fast growth in balances held by for borrowers age 60+, up nearly nine-fold As a consequence, share of balances held by borrowers age 40+ increased from 25% to 35% 2/3 of student loan balances are held by borrowers not in their 20s 7
Distribution of borrowers by 2014Q4 balance 18.5% 7.2% 2.9% 1.0% 0.8% 2.4% 20.8% Balance in 2014Q4: $5k >$5k and $10k >$10k and $25k >$25k and $50k >$50k and $75k >$75k and $100k >$100k and $150k >$150k and $200k >$200k 18.0% 28.5% 43.3 million borrowers Mean balance: $26,700 Median balance: $14,400 Source: FRBNY Consumer Credit Panel/Equifax 8
Significant heterogeneity in amounts owed Most borrowers have a current outstanding balance below $25k About 40% owe less than $10K Mean outstanding balance is $26k; median balance is $15k Significant numbers of borrowers with large balances (over $25K) Borrowers in their 30 s and 40 s have the highest mean and median balances, at about $31k and $17k respectively 9
Who is borrowing now? Millions 14 Number of originating borrowers by age* 12 10 8 6 4 2 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 less than 25 25-29 30-39 40+ Source: FRBNY Consumer Credit Panel/Equifax; * excludes small number of borrowers with missing age 10
Number of active borrowers peaked in 2010 The number of active student loan borrowers peaked in 2010, at about 12 million; now down to about 9 million Half of active borrowers are under age 25 After the recession, there was a slight increase in the relative share of new borrowers in their thirties, and a decline in the share of 18-29 year olds The Department of Education estimates suggest that there was a modest drop in enrollment between 2010 and 2013, of about 500,000 students More importantly, a smaller share of enrolled students has taken out loans since 2010 Although the number of active borrowers is declining, the aggregate outstanding balance of borrowers overall has continued to grow as repayment rates are very low 11
Increase, then decline in borrowers from lower and middle income areas Millions 14 Number of originating borrowers by ZIP code income* 12 10 8 6 4 2 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 up to 40k 40k-60k 60k-80k 80k+ 12 Source: FRBNY Consumer Credit Panel/Equifax; Internal Revenue Service; * excludes small number of borrowers with missing ZIP code incomes
Larger rise in level of lower income borrowers following recession Index, 2004=100 1.5 Active borrowers by ZIP code income 1.4 1.3 1.2 1.1 1 0.9 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 up to 40k 40k-60k 60k-80k 80k-100k 13 Source: FRBNY Consumer Credit Panel/Equifax; Internal Revenue Service; * excludes small number of borrowers with missing ZIP code incomes
Increase, then decline in borrowers from lower and middle income areas We don t have borrower income, so we assign borrowers to groups based on the average income in the ZIP code they lived in when they originated their first student loan Income data are from IRS and refer to 2010 Much of the change in borrowing has come from an increase, then decrease, in the number of active borrowers from lower income areas following the recession More borrowers from lower and middle-income areas is consistent with the intended purpose of student loan program: to facilitate upward income mobility 14
Wrapping up, part 1 Student debt continues to increase, especially for older borrowers Increase reflects new borrowers, higher balances and slow repayment There is significant heterogeneity in amounts owed Highest balances are owed by borrowers in their 30s The number of active borrowers peaked in 2010 Significant decline since then Increase and subsequent decline driven by borrowers from relatively lower-income areas 15
Student loan default & repayment for internal use only
Distribution of payment history Snapshot of Borrowers in 2014:Q4 11% 6% 29% Percent of Borrowers always current, balance decreasing always current, balance increasing current with previous blemish 20% now delinquent now in default 34% Source: New York Fed Consumer Credit Panel / Equifax 17
Understanding repayment outcomes We will compare several groups to better understand the determinants of repayment outcomes: Those who left school before, during, and after the Great Recession Younger borrowers and older borrowers Borrowers from higher income and lower income areas 18
Defaults and default rate Thousands per year 1,400 Annual rate 4.0% 1,200 3.5% 1,000 800 3.0% 2.5% 2.0% 600 400 1.5% 1.0% 200 0.5% 0 2003-4 2005-6 2007-8 2009-10 2011-12 2013-14 defaulted borrowers rate of default 0.0% Source: FRBNY Consumer Credit Panel/Equifax 19
Defaults and default rate The number of borrowers who default each year (defined as at least 9 months past due) increased from about half a million ten years ago to 1.2 million annually in 2011 and 2012 The number of borrowers who default has declined a bit in the last two years The rapid increase in the defaults is partly due to the increase in the number of borrowers, but even after accounting for the increase in the borrowers, the rate of default increased over time from 2.4% in 2004 to 3.6% in 2012 The default rate declined somewhat after 2012 to 3.2% 20
Default rate by school leaving cohort Share ever defaulted by years after leaving school 25% 2009 Cohort 26% 5 years later 2007 Cohort 24% 7 years later 20% 2005 Cohort 25% 9 years later 15% 10% 5% 0% 1 year later 2 years 3 years 4 years 5 years 6 years 7 years 8 years 9 years (after entering repayment) Source: New York Fed Consumer Credit Panel / Equifax 21
Cohort default rates deteriorate Default rates for the 2005, 2007, and 2009 school-leaving cohorts have all now reached roughly 25%. Cohort default rates continue to increase even beyond the third year of loan repayment There is a pronounced worsening of the cohort default rate schedules over time Default rates are higher for later cohorts at virtually all durations 22
5-year cohort default and delinquency rates by ZIP income 60% 2005 school leaving cohort 60% 2007 school leaving cohort 60% 2009 school leaving cohort 50% 50% 50% 40% 40% 40% 30% 30% 30% 20% 20% 20% 10% 10% 10% 0% less than 40k 40k-60k 60k-80k 80k+ 0% less than 40k 40k-60k 60k-80k 80k+ 0% less than 40k 40k-60k 60k-80k 80k+ default 120+ dpd Source: FRBNY Consumer Credit Panel/Equifax 23
Cohort default, delinquency rates by income Default and delinquency rates higher in lower-income areas Default and delinquency rates for borrowers from higher income areas (with mean income over $60K) have remained remarkably stable across the three cohorts 24
5-yr Cohort default and delinquency rates by age 2005 school leaving cohort 2007 school leaving cohort 2009 school leaving cohort 60% 60% 60% 50% 50% 50% 40% 40% 40% 30% 30% 30% 20% 20% 20% 10% 10% 10% 0% less than 25 25-29 30-39 40+ 0% less than 25 25-29 30-39 40+ 0% less than 25 25-29 30-39 40+ default 120+ dpd Source: FRBNY Consumer Credit Panel/Equifax 25
Cohort default, delinquency rates by school-leaving age The 5-year-default rate increased for all age groups, and it is somewhat elevated for those who left school between age 30-39 About half of the 2009 cohort borrowers in this age range had gone through defaults or severe delinquency in the subsequent 5 periods 26
Student loan repayment behavior Student Loan Repayment Status in 2014 current, balance increasing 33% delinquent or in default 17% current, same balance 13% current and paying down 37% Source: New York Fed Consumer Credit Panel / Equifax 27
Nearly half of borrowers are not yet repaying 17% of the borrowers are in default or in delinquency Only 37% of borrowers are current on their loan and actively paying down 46% of borrowers are current on their loans but are not in repayment 28
5-year cohort repayment difficulties, by ZIP income 80% 2005 school leaving cohort 80% 2007 school leaving cohort 80% 2009 school leaving cohort 70% 70% 70% 60% 60% 60% 50% 50% 50% 40% 40% 40% 30% 30% 30% 20% 20% 20% 10% 10% 10% 0% less than 40k 40k-60k 60k-80k 80k+ 0% less than 40k 40k-60k 60k-80k 80k+ default 120+ dpd debt increase 0% less than 40k 40k-60k 60k-80k 80k+ Source: FRBNY Consumer Credit Panel/Equifax 29
Proportion of borrowers with payment problems by cohort and income While default and delinquency rates were stable for higher income area borrowers across the three cohorts, more recent cohorts from higher income areas had a larger proportion who had not paid down About half of the 2009 cohort are having payment difficulties on their loans (having either defaulted, gone delinquent or made no progress paying off their balance) Repayment difficulties are particularly prevalent in borrowers from lower-income areas, where about 2/3 of borrowers have had some sort of repayment difficulty In contrast, just over 1/3 of the borrowers from the highest income areas have had repayment difficulties 30
2009 cohort repayment rates by income Proportion of balance remaining by ZIP income 100% 95% 90% 85% 80% 75% 70% 65% 60% 1 year 2 years 3 years 4 years 5 years (years after leaving school) less than 40k 40k-60k 60k-80k 80k+ Source: FRBNY Consumer Credit Panel/Equifax 31
Little repayment progress by borrowers from lower-income areas We look at the net progress that borrowers from each income area have made in paying down their student loan balances The borrowers from the lowest income areas have made practically no progress on paying down their loans The aggregate balance, five years after leaving school, is still at 97% of where it was when they left school This is a sharp contrast with the borrowers from higherincome areas, who have paid down nearly 30% 32
Wrapping up These results are further evidence of the important heterogeneity we see in the outcomes of higher education investments financed with student debt Borrowers who left school in the Great Recession had particular difficulty with their student loan repayment, with many defaulting, becoming seriously delinquent, or not being able to reduce their balance Borrowers from lower and middle-income areas as well as borrowers who originated loans in their 30s are also at greater risk of default and delinquency The low overall repayment rate helps explain the steady growth in aggregate student debt, now at nearly 1.2 trillion dollars 33