Student Loan Borrowing and Repayment Trends, 2015 · PDF fileUnderstanding causes and...

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.

Student Loan Borrowing and Repayment Trends, 2015 April 16, 2015

Andrew Haughwout, Donghoon Lee, Joelle Scally, Wilbert van der Klaauw

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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.”

Some higher education background

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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

Researching student borrowing

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Student loans defy business cycle

0

100

200

300

400

500

600

700

800

900

1000

1100

1200

0

100

200

300

400

500

600

700

800

900

1000

1100

1200 Non - mortgage balances

HELOC Auto Loan Student Loan Credit Card

Billions of Dollars Billions of Dollars

Source: New York Fed Consumer Credit Panel / Equifax

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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

Student loans increased as other debts declined

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Total student loan balances by age group

0

200

400

600

800

1,000

1,200

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

under 30 30-39 40-49 50-59 60+

32%

Billions of Dollars

18%

12%

5%

33%


42%

33%

14% 9% 2%

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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

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Distribution of borrowers by 2014Q4 balance

Balance in 2014Q4: 20.8%

18.0%

28.5%

18.5%

7.2%

2.9%

2.4% 1.0%

0.8%

≤$5k >$5k and ≤$10k >$10k and ≤$25k >$25k and ≤$50k >$50k and ≤$75k >$75k and ≤$100k >$100k and ≤$150k >$150k and ≤$200k >$200k

Source: FRBNY Consumer Credit Panel/Equifax

43.3 million borrowers Mean balance: $26,700 Median balance: $14,400

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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

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Who is borrowing now?

Source: FRBNY Consumer Credit Panel/Equifax; * excludes small number of borrowers with missing age

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Number of originating borrowers by age*

less than 25 25-29 30-39 40+

Millions

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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

Number of active borrowers peaked in 2010

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Increase, then decline in borrowers from lower and middle income areas

Source: FRBNY Consumer Credit Panel/Equifax; Internal Revenue Service; * excludes small number of borrowers with missing ZIP code incomes

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4

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Number of originating borrowers by ZIP code income*

up to 40k 40k-60k 60k-80k 80k+

Millions

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Larger rise in level of lower income borrowers following recession

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1.1

1.2

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1.4

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Active borrowers by ZIP code income

up to 40k 40k-60k 60k-80k 80k-100k

Index, 2004=100

Source: FRBNY Consumer Credit Panel/Equifax; Internal Revenue Service; * excludes small number of borrowers with missing ZIP code incomes

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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

Increase, then decline in borrowers from lower and middle income areas

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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

Wrapping up, part 1

for internal use only

Student loan default & repayment

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Distribution of payment history

29%

34%

20%

6%

11%

Snapshot of Borrowers in 2014:Q4

always current, balance decreasing

always current, balance increasing

current with previous blemish

now delinquent

now in default

Percent of Borrowers


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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

Understanding repayment outcomes

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Defaults and default rate


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

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2003-4 2005-6 2007-8 2009-10 2011-12 2013-14defaulted borrowers rate of default

Thousands per year Annual rate

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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%

Defaults and default rate

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Default rate by school leaving cohort

2009 Cohort 26%

5 years later

2007 Cohort 24%

7 years later

2005 Cohort 25%

9 years later

0%

5%

10%

15%

20%

25%

1 year later 2 years 3 years 4 years 5 years 6 years 7 years 8 years 9 years

Share ever defaulted by years after leaving school


(after entering repayment)

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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

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5-year cohort default and delinquency rates by ZIP income


0%

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30%

40%

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60%

less than 40k

40k-60k 60k-80k 80k+

2005 school leaving cohort

0%

10%

20%

30%

40%

50%

60%

less than 40k

40k-60k 60k-80k 80k+


default 120+ dpd

0%

10%

20%

30%

40%

50%

60%

less than 40k

40k-60k 60k-80k 80k+


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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

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5-yr Cohort default and delinquency rates by age


0%

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30%

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60%

lessthan 25

25-29 30-39 40+


0%

10%

20%

30%

40%

50%

60%

lessthan 25

25-29 30-39 40+


default 120+ dpd

0%

10%

20%

30%

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50%

60%

lessthan 25

25-29 30-39 40+


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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

Cohort default, delinquency rates by school-leaving age

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Student loan repayment behavior

delinquent or in default

17%

current and paying down 37%

current, same balance

13%

current, balance increasing

33%

Student Loan Repayment Status in 2014


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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

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5-year cohort repayment difficulties, by ZIP income


0%

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less than 40k

40k-60k 60k-80k 80k+


default 120+ dpd debt increase

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30%

40%

50%

60%

70%

80%

less than 40k

40k-60k 60k-80k 80k+


0%

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50%

60%

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80%

less than 40k

40k-60k 60k-80k 80k+


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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

Proportion of borrowers with payment problems by cohort and income

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2009 cohort repayment rates by income


60%

65%

70%

75%

80%

85%

90%

95%

100%

1 year 2 years 3 years 4 years 5 years

Proportion of balance remaining by ZIP income

less than 40k 40k-60k 60k-80k 80k+

(years after leaving school)

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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 higher-

income areas, who have paid down nearly 30%

Little repayment progress by borrowers from lower-income areas

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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

Wrapping up

Student Loan Borrowing and Repayment Trends, 2015 · PDF fileUnderstanding causes and...

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