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
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
Part 1: Growth of Student Loans for internal use only 3
Total student loan balances by age group increasing across all age groups Billions of Dollars 1,000 900 800 700 5% 12% 17% 600 500 33% 400 300 200 100 33% 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 under 30 30-39 40-49 50-59 60+ 4
Non-mortgage balances Billions of Dollars 1000 900 HELOC Auto Loan Student Loan Credit Card 800 700 600 500 400 300 200 100 0 Billions of Dollars 1000 900 800 700 600 500 400 300 200 100 0 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
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 $100,000-150,000 $150,000-200,000 $200,000+ 40% of borrowers have balances less than $10,000 3.7% of borrowers have balances greater than $100,000 6
Number of borrowers and average balances per person Millions 40 30 20 Number of borrowers Thousands of Dollars Average balance per borrower 25 20 15 10 10 5 0 0 Each increased by 70% between 2004 and 2012 (7% per year) 7
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
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
Part 2: Student Debt Delinquency for internal use only 10
Share of borrowers 90+ days delinquent 40% 35% 30% 25% 20% 15% 10% 5% 0% age<30 age 30-49 age 50+ all 2004 2008 2012 6.7 million borrowers, or 17%, are 90+ days delinquent. 30-49 year olds have higher delinquency rates. 11
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
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 30-49 age 50+ all ages 0% age<30 age 30-49 age 50+ all ages 2004 2008 2012 2004 2008 2012 13
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% 2005 2006 2007 2008 2009 2010 2011 2012 0% 14
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 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%.. 15
Part 3: Student debt and other debts for internal use only 16
Non-student debt declined for all borrowers age 25-30 Decline particularly pronounced for borrowers with larger student debt $60,000 Average non-student loan balances, age 25-30 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+ 2005 2005 Student Debt Balance 2012 2012 Student Debt Balance 17
Share borrowers age 25-30 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 2012. Note: delinquency is as of Q4 of previous year 18
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
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
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
Reference Charts 22
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 10 9 8 7 6 5 4 3 2 1 0 Unemployment Rate Dec-2007 Jun-2009 Jan-2013 High School Graduate Dec-2007 Jun-2009 Jan-2013 Bachelor's degree Median Dollars per Week 1200 1000 Median Weekly Earnings, 2012:Q4 800 600 400 200 0 high school graduates bachelor's degree or higher 23
Distribution of Student Debt balance, 4Q:2005 Distribution of Student Debt balance, 4Q:2012 1.1% 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