Postsecondary National Policy Institute (PNPI) 8/14/13

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 at 11am today.

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 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)

Breaking news

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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

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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: Bureau of Labor Statistics

for internal use only

Part 1: Growth of Student Loans

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Total student loan balances by age groupincreasing across all age groups

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100

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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

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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.

Source: FRBNY Consumer Credit Panel / Equifax

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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

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Mill

ions

Number of borrowers

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

Source: FRBNY Consumer Credit Panel / Equifax

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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

Source: FRBNY Consumer Credit Panel / Equifax

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Student borrowing increasingly prevalent

Source: FRBNY Consumer Credit Panel / Equifax

0

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15000

20000

25000

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Student debt prevalence and mean among 25 year olds

Proportion of 25 year olds with studentloans, left axis

Mean student loan debt among borrowersat 25, right axis

for internal use only

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.

Source: FRBNY Consumer Credit Panel / Equifax

0%

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40%

age<30 age 30-49 age 50+ all

2004 2008 2012

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

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not in repayment: balance 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 repayment:

balance delinquent

17%

in repayment: balance not delinquent

39%

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

Source: FRBNY Consumer Credit Panel / Equifax

0%

5%

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40%

age<30 age 30-49 age 50+ all ages

Share of borrowers in repayment 90+ days delinquent

2004 2008 2012

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age<30 age 30-49 age 50+ all ages

Share of borrowers 90+ days delinquent

2004 2008 2012

for internal use only

Part 3: Subsequent Economic Activity

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Young student borrowers retreat from housing marketwith coauthor Sydnee Caldwell

Source: FRBNY Consumer Credit Panel / Equifax

0.2

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

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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

Source: FRBNY Consumer Credit Panel / Equifax

0.24

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

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Proportion with auto debt at age 25

Any student loan debt ages 22-25 No student loan debt ages 22-25

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Student borrowing increasingly prevalent

Source: FRBNY Consumer Credit Panel / Equifax

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25000

0

0.05

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0.35

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0.45

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Student debt prevalence and mean among 25 year olds

Proportion of 25 year olds with studentloans, left axis

Mean student loan debt among borrowersat 25, right axis

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Student borrowers deleverage, despite rapid SL growth

Source: FRBNY Consumer Credit Panel / Equifax

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Average total debt at age 25

Any student loan debt ages 22-25 No student loan debt ages 22-25

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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

Source: FRBNY Consumer Credit Panel / Equifax

610

615

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635

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645

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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

for internal use only

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