Research Perspective on Student Lending

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Student Debt Overview
NCHER Legislative Conference
September 26, 2013
Meta Brown, Federal Reserve Bank of New York
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
Recent Household Balance Sheet Developments
 FRBNY’s 2013Q2 Household Debt and Credit Report was released in
mid-August.
 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 (credit reporting of) 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)
2
Higher Education and Student Debt
 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.
3
Data: FRBNY Consumer Credit Panel (CCP) / Equifax
 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
4
Part 1: Growth of Student Loans
for internal use only
5
Total student loan balances by age group
increasing across all age groups
Billions of Dollars
1,000
5%
900
12%
800
700
17%
600
500
33%
400
300
200
33%
100
0
2004
2005
2006
2007
2008
under 30 30-39 40-49
Source: FRBNY Consumer Credit Panel / Equifax
2009
50-59
2010
60+
2011
2012
6
Non-mortgage balances
Billions of Dollars
1000
HELOC
900
Billions of Dollars
1000
Auto Loan
Student Loan
Credit Card
900
800
800
700
700
600
600
500
500
400
400
300
300
200
Source: FRBNY Consumer Credit Panel / Equifax
100
200
100
0
0
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.
7
Number of borrowers and average balance per person
40
30
20
Average balance per borrower
Thousands of Dollars
Millions
Number of borrowers
25
20
15
10
10
5
0
0
Each increased by 70% between 2004 and 2012 (7% per year)
Source: FRBNY Consumer Credit Panel / Equifax
8
Distribution of student loan balance, 2012:Q4
2.2%
0.9% 0.6%
Balance
9.0%
39.9%
17.7%
$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+
29.8%
40% of borrowers have balances less than $10,000
3.7% of borrowers have balances greater than $100,000
Source: FRBNY Consumer Credit Panel / Equifax
9
Student borrowing increasingly prevalent
Student debt prevalence and mean among 25 year olds
0.5
25000
0.45
0.4
20000
0.35
0.3
15000
Proportion of 25 year olds with student
loans, left axis
0.25
Mean student loan debt among borrowers
at 25, right axis
0.2
10000
0.15
0.1
5000
0.05
0
0
2003
2004
2005
2006
Source: FRBNY Consumer Credit Panel / Equifax
2007
2008
2009
2010
2011
2012
10
Part 2: Student Debt Delinquency
11
for internal use only
Share of borrowers 90+ days delinquent (incl. default)
40%
35%
30%
25%
20%
15%
10%
5%
0%
age<30
age 30-49
2004 2008
Source: FRBNY Consumer Credit Panel / Equifax
age 50+
all
2012
6.7 million borrowers, or 17%, are 90+ days delinquent.
30-49 year olds have higher delinquency rates.
12
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…
Source: FRBNY Consumer Credit Panel / Equifax
in
repayment:
balance
delinquent
17%
not in
repayment:
balance up
30%
not in
repayment:
balance the
same
14%
in
repayment:
balance not
delinquent
39%
* Repayment status is defined using the quarterly
change in balance and the current payment status. 13
Delinquency rates higher among borrowers in repayment
Share of borrowers 90+ days
delinquent
Share of borrowers in repayment
90+ days delinquent
40%
40%
35%
35%
30%
30%
25%
25%
20%
20%
15%
15%
10%
10%
5%
5%
0%
0%
age<30 age 30-49 age 50+
2004
2008
all ages
2012
Source: FRBNY Consumer Credit Panel / Equifax
age<30 age 30-49 age 50+
2004
2008
all ages
2012
14
Part 3: Subsequent Economic Activity
15
for internal use only
Young student borrowers retreat from housing market
with coauthor Sydnee Caldwell
Proportion with home-secured debt at age 30
0.34
0.34
0.32
0.32
0.3
0.3
0.28
0.28
0.26
0.26
0.24
0.24
0.22
0.22
0.2
0.2
2003
2004
2005
2006
2007
Any student loan debt ages 27-30
Source: FRBNY Consumer Credit Panel / Equifax
2008
2009
2010
2011
2012
No student loan debt ages 27-30
16
Young student borrowers retreat from auto market
Proportion with auto debt at age 25
0.4
0.4
0.38
0.38
0.36
0.36
0.34
0.34
0.32
0.32
0.3
0.3
0.28
0.28
0.26
0.26
0.24
0.24
2003
2004
2005
2006
2007
Any student loan debt ages 22-25
Source: FRBNY Consumer Credit Panel / Equifax
2008
2009
2010
2011
2012
No student loan debt ages 22-25
17
Student borrowing increasingly prevalent
Student debt prevalence and mean among 25 year olds
0.5
25000
0.45
0.4
20000
0.35
0.3
15000
Proportion of 25 year olds with student
loans, left axis
0.25
Mean student loan debt among borrowers
at 25, right axis
0.2
10000
0.15
0.1
5000
0.05
0
0
2003
2004
2005
2006
Source: FRBNY Consumer Credit Panel / Equifax
2007
2008
2009
2010
2011
2012
18
Student borrowers deleverage, despite rapid SL growth
Average total debt at age 25
40000
40000
35000
35000
30000
30000
25000
25000
20000
20000
15000
15000
10000
10000
5000
5000
0
0
2003
2004
2005
2006
2007
Any student loan debt ages 22-25
Source: FRBNY Consumer Credit Panel / Equifax
2008
2009
2010
2011
2012
No student loan debt ages 22-25
19
Why the decline in housing & auto market participation?
 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:
20
Declining relative credit scores of student borrowers
Average Equifax risk scores at 25 and 30
660
660
655
655
Age 25, student loan 22-25
Age 30, student loan 27-30
Age 25, no student loan 22-25
Age 30, no student loan 27-30
650
650
645
645
640
640
635
635
630
630
625
625
620
620
615
615
610
610
2003
2004
2005
2006
2007
Source: FRBNY Consumer Credit Panel / Equifax
2008
2009
2010
2011
2012
21
Conclusion
 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%.
22
Conclusion
 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.
23
APPENDIX
24
for internal use only
Appendix: www.newyorkfed.org/householdcredit
 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)
25
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