Student Debt Overview: Postsecondary National Policy Institute (PNPI)

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Higher Education and Student Debt Overview:

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.

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Student Debt Overview: Postsecondary National Policy Institute (PNPI)

  1. 1. Student Debt Overview Postsecondary National Policy Institute (PNPI) 8/14/13 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
  2. 2. Breaking news  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) 2
  3. 3. 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
  4. 4. 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
  5. 5. 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 Jun-2009 1200 9 Jan-2013 8 Percent 7 6 5 Dec-2007 Jun-2009 Jan-2013 4 3 Dec-2007 2 1 0 Median Dollars per Week 10 Median Weekly Earnings, 2012:Q4 1000 800 600 400 200 0 High School Graduate Bachelor's degree high school graduates bachelor's degree or higher 5 Source: Bureau of Labor Statistics
  6. 6. Part 1: Growth of Student Loans for internal use only 6
  7. 7. 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 7
  8. 8. Non-mortgage balances Billions of Dollars 1000 HELOC 900 Auto Loan Student Loan Credit Card Billions of Dollars 1000 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. 8
  9. 9. 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 0 5 0 Each increased by 70% between 2004 and 2012 (7% per year) Source: FRBNY Consumer Credit Panel / Equifax 9
  10. 10. 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 10
  11. 11. 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 11
  12. 12. Part 2: Student Debt Delinquency 12 for internal use only
  13. 13. 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. 13
  14. 14. 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. 14
  15. 15. 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 15
  16. 16. Part 3: Subsequent Economic Activity 16 for internal use only
  17. 17. 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 17
  18. 18. 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 18
  19. 19. 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 19
  20. 20. 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 20
  21. 21. 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: 21
  22. 22. 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 22
  23. 23. 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%. 23
  24. 24. 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. 24
  25. 25. APPENDIX 25 for internal use only
  26. 26. 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) – 26

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