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.
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Part 1: Growth of Student Loans

for internal use only

Total student loan balances by age group

increasing across all age groups
Billions of Dollars 1,000 900 800 700 600 500 400 300 200 33% 100 0 2004 2005 2006 2007 2008 under 30 30-39 40-49 2009 50-59 2010 60+ 2011 2012
4

5% 12%

17%

33%

Source: FRBNY Consumer Credit Panel / Equifax

Non-mortgage balances
Billions of Dollars 1000 HELOC 900 800 700 600 500 400 300 200 100 0 Source: FRBNY Consumer Credit Panel / Equifax Billions of Dollars 1000 Auto Loan Student Loan Credit Card 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.

Distribution of student loan balance, 2012:Q4

2.2% 0.9% 0.6%

9.0%

Balance

17.7%

39.9%

$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
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Number of borrowers and average balances per person

Number of borrowers
Millions Thousands of Dollars 40

Average balance per borrower

25

20

30

15

20

10 10 5

Each increased by 70% between 2004 and 2012 (7% per year)
Source: FRBNY Consumer Credit Panel / Equifax
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Student borrowing increasingly prevalent

Share of 25 year olds with student debt
45% 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 Source: FRBNY Consumer Credit Panel / Equifax
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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
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Part 2: Student Debt Delinquency

for internal use only

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Share of borrowers 90+ days delinquent

40% 35% 30% 25% 20% 15% 10% 5% 0% age<30 age 30-49 age 50+ 2012 all 2004 2008 Source: FRBNY Consumer Credit Panel / Equifax

6.7 million borrowers, or 17%, are 90+ days delinquent. 30-49 year olds have higher delinquency rates.

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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%

Source: FRBNY Consumer Credit Panel / Equifax

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Delinquency rates higher among borrowers in repayment

Share of borrowers 90+ days delinquent
40% 35% 30% 25% 20% 15% 10% 5% 0% age<30 age 30-49 age 50+ 2004 2008 2012 all ages 40% 35% 30% 25% 20% 15% 10% 5% 0% age<30 age 30-49 age 50+ 2004 2008 2012
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Share of borrowers in repayment 90+ days delinquent

all ages

Source: FRBNY Consumer Credit Panel / Equifax

Quarterly transition rate of borrowers in repayment from current to delinquent

9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2005 2006 2007 2008 2009 2010 2011 2012
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9% 8% 7% 6% 5% 4% 3% 2% 1% 0%

Source: FRBNY Consumer Credit Panel / Equifax

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%. .

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Part 3: Student debt and other debts

for internal use only

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Non-student debt declined for all borrowers age 25-30

Decline particularly pronounced for borrowers with larger student debt Average non-student loan balances, age 25-30
$60,000 auto $50,000 $40,000 $30,000 $20,000 $10,000 $0 $75K-100K $75K-100K $10K-25K $25K-50K $50K-75K $10K-25K $25K-50K $50K-75K $100K+ $100K+ $1-10K $1-10K $0 $0 credit card mortgage heloc other $50,000 $40,000 $30,000 $20,000 $10,000 $0 $60,000

2005 Student Debt Balance 2005 Student Debt Balance Source: FRBNY Consumer Credit Panel / Equifax

2012 Student Debt Balance 2012 Student Debt Balance

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Share borrowers age 25-30 years old with new mortgage originations
no student debt with current 100K+ student debt
18% 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 current student debt with 90+ delinquent student debt

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
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Non-student debt 90+ days delinquent, age 25-30, 12:Q4

40% 35% 30% 25% 20% 15% 10% 5% 0% no student debt auto loans current student debt credit card mortgage 90+ delinquent student debt

Delinquent student loan borrowers are very likely to be delinquent on other debt as well.
Source: FRBNY Consumer Credit Panel / Equifax
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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.

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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.

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Reference Charts

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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.
Unemployment Rate
10 9 8 7 Percent 6 5 4 3 2 1 0 High School Graduate Bachelor's degree
Dec-2007 Dec-2007 Jun-2009 Jan-2013 Jun-2009 Jan-2013

Median Weekly Earnings, 2012:Q4

1200 Median Dollars per Week 1000 800 600 400 200 0 high school graduates bachelor's degree or higher
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Source: FRBNY Consumer Credit Panel / Equifax

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% 6.5% 11.5% 1-10K 10K-25K 25K-50K 50K-75K 55.5% 26.8% 75K-100K 100K-150K 150K-200K 200K+ 29.8% 17.7% 39.9% 1-10K 10K-25K 25K-50K 50K-75K 75K-100K 100K-150K 150K-200K 200K+ 0.9% 0.6%

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Source: FRBNY Consumer Credit Panel / Equifax