Analysis ofStudent Loan Debt

February 28, 2013 Donghoon Lee

Household Debt and Credit: Student Debt

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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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.

Higher Education and Student Debt

for internal use only

Part 1: Growth of Student Loans

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Total student loan balances by age group increasing across all age groups

0

100

200

300

400

500

600

700

800

900

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 and has now the second largest balance after mortgage debt.


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0

100

200

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1000HELOC Auto Loan Student Loan Credit Card

Billions of Dollars Billions of Dollars

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Distribution of student loan balance, 2012:Q4

40% of borrowers have balances less than $10,000 3.7% 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


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Number of borrowers and average balances per person

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Mill

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Number of borrowers

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


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Thou

sand

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Dol

lars

Average balance per borrower

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Student borrowing increasingly prevalent


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2004:Q4 2005:Q4 2006:Q4 2007:Q4 2008:Q4 2009:Q4 2010:Q4 2011:Q4 2012:Q4

Share of 25 year olds with student debt

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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

Summary 1: Growth of Student Debt


Part 2: Student Debt Delinquency

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Share of borrowers 90+ days delinquent

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


0%

5%

10%

15%

20%

25%

30%

35%

40%

age<30 age 30-49 age 50+ all

2004 2008 2012

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not in repayment: balance the

same 14%

not in repayment: balance up

30%

Borrower repayment status, 2012:Q4

About 44% of borrowers are not yet in repayment due to deferments and forbearances.

in repayment:

balance delinquent

17%

in repayment: balance not delinquent

39%


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Delinquency rates higher among borrowers in repayment


0%

5%

10%

15%

20%

25%

30%

35%

40%

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

Share of borrowers in repayment 90+ days delinquent

2004 2008 2012

0%

5%

10%

15%

20%

25%

30%

35%

40%

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

Share of borrowers 90+ days delinquent

2004 2008 2012

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Quarterly transition rate of borrowers in repayment from current to delinquent


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2005 2006 2007 2008 2009 2010 2011 2012

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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%.

.

Summary 2: Student Debt Delinquency


Part 3: Student debt and other debts

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Non-student debt declined for all borrowers age 25-30 Decline particularly pronounced for borrowers with larger student debt


$0

$10,000

$20,000

$30,000

$40,000

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$0

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$60,000$0

$1-1

0K

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K

$100

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$1-1

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$75K

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K

$100

K+

2005 Student Debt Balance 2012 Student Debt Balance

Average non-student loan balances, age 25-30

auto credit card mortgage heloc other

2005 Student Debt Balance 2012 Student Debt Balance

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Share borrowers age 25-30 years old with new mortgage originations

Note: delinquency is as of Q4 of previous year

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.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2005:Q4 2006:Q4 2007:Q4 2008:Q4 2009:Q4 2010:Q4 2011:Q4 2012:Q4

no student debt with current student debtwith current 100K+ student debt with 90+ delinquent student debt

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

Delinquent student loan borrowers are very likely to be delinquent on other debt as well.


0%

5%

10%

15%

20%

25%

30%

35%

40%

no student debt current student debt 90+ delinquent student debt

auto loans credit card mortgage

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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.

Summary 3: Student Debt and Other Debt

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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.

Conclusion

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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.

0

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high schoolgraduates

bachelor's degreeor higher

Med

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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


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39.9%

29.8%

17.7%

6.5%

2.5% 2.2%

0.9%

0.6%

Distribution of Student Debt balance, 4Q:2012

1-10K

10K-25K

25K-50K

50K-75K

75K-100K

100K-150K

150K-200K

200K+

55.5% 26.8%

11.5%

3.2%

1.3% 1.1%

0.4% 0.2%

Distribution of Student Debt balance, 4Q:2005

1-10K

10K-25K

25K-50K

50K-75K

75K-100K

100K-150K

150K-200K

200K+


Analysis ofStudent Loan Debt

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