Does Rising Student Debt Affect the Home Purchases of Young - - PowerPoint PPT Presentation

Upjohn Institute, October 26, 2013 Meta Brown, Andrew Haughwout, Donghoon Lee, Joelle Scally, Wilbert van der Klaauw

Does Rising Student Debt Affect the Home Purchases of Young Borrowers?

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 is now over $1

trillion, and is attracting special attention from policymakers, the media, and the public.

• We present our analysis on the historical and current situation of

student debt and discuss its implications for the borrowers and the economy.

Higher Education and Student Debt

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• Data
• Accounting for aggregate balance growth
• Student loan payment and delinquency
• Student loan and Housing and other debt.

Outline

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• 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.

• FRBNY CCP contains borrower level information on student loan

balance, payment status together with other types of household debt such as mortgages, credit cards and auto loans – but no information

• n federal loans vs. private loans.
• This is a source data for “FRBNY Quarterly report on Household debt

and credit” which updates information on student loan borrowers and related household debt.

• www.newyorkfed.org/householdcredit

About the Data

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Panel of loans, individuals and households based on individual credit reports

• Ability to track individual borrowers over time: follow individuals

with and without student loans (entry and exit), and can link over consolidations, rehabilitations, account transfers due to defaults

• Ability to link multiple loans for same person at any point in

time: multiple student loan accounts, federal and private loans

• Ability to link individuals in the same household: credit/loan

situation of all family members – total exposure and distribution within household, Parents plus loans and parents cosigning for their children

• Data. The FRBNY Consumer Credit Panel

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Representative Panel and Household Matching

Unique sample design generating a longitudinal quarterly panel of individuals and households from 1999-2013.

• Universe: entire US Population with credit files (240 million

individuals per quarter, aged 18 and older.)

• Sample selection: random 5% using last 4 digits of SSN +

All household members

• Household matching: based on home address
• Representative sample of US individuals and households

(about 40 million individuals per quarter)

Sample Design

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• Longitudinal information on all individual student loans

and mortgages

• Individual account variables: opening date, origination amount,

current balance, origination balance, delinquency status, individual/joint account, term/monthly payment, narrative codes detailing credit events such as default

• Borrower level information on auto loans, credit cards
• Consumer-level auto loan, credit card data: Total

Balance/Number of accounts by Delinquency Status,

• rigination amount and credit limit
• Public record information
• Public record information on bankruptcies, collections, tax liens
• Individual characteristics
• Borrower characteristics: birth year, geographic location (state,

zipcode, census block)

Main Features of FRBNY CCP

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

100 200 300 400 500 600 700 800 900 1,000 2004 2005 2006 2007 2008 2009 2010 2011 2012 under 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.

Source: FRBNY Consumer Credit Panel / Equifax 100 200 300 400 500 600 700 800 900 1000 100 200 300 400 500 600 700 800 900 1000 HELOC 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 Source: FRBNY Consumer Credit Panel / Equifax

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Number of borrowers and average balance per person

10 20 30 40 Millions

Number of borrowers

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

Source: FRBNY Consumer Credit Panel / Equifax 5 10 15 20 25 Thousands of Dollars

Average balance per borrower

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Student borrowing increasingly prevalent

Source: FRBNY Consumer Credit Panel / Equifax 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
• High inflow:

▫ Increasing number of new borrowers ▫ Taking more years to complete education

• Low outflow:

▫ Low repayment rates ▫ High delinquency

• Two-thirds of the outstanding balance is held by borrowers

under 40 years old

• Student loans are now the second-largest form of household

debt, after mortgages

Summary 1: Growth of Student Debt

for internal use only

Part 2: Student Debt Delinquency

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

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

Share of borrowers 90+ days delinquent (incl. default)

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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 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…

in repayment: balance delinquent 17% in repayment: balance not delinquent 39%

Source: FRBNY Consumer Credit Panel / Equifax

* Repayment status is defined using the quarterly change in balance and the current payment status.

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Delinquency rates higher among borrowers in repayment

Source: FRBNY Consumer Credit Panel / Equifax 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 non-delinquent to delinquent

Source: FRBNY Consumer Credit Panel / Equifax 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 active repayment, and

excluding those, the effective 90+ delinquency rate rises to more than 30%.

• The transition rate among borrowers in active repayment from

current to delinquent has been rising since 2008 from about 7% to nearly 9%.

Summary 2: Student Debt Delinquency

for internal use only

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

Source: FRBNY Consumer Credit Panel / Equifax $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $0 $1-10K $10K-25K $25K-50K $50K-75K $75K-100K $100K+ $0 $1-10K $10K-25K $25K-50K $50K-75K $75K-100K $100K+ 2005 Student Debt Balance 2012 Student Debt Balance

Average non-student loan balances, age 25-30

auto credit card mortgage HELOC

• ther

2005 Student Debt Balance 2012 Student Debt Balance

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Deleveraging of Household Debt

3 6 9 12 15 3 6 9 12 15 Mortgage HE Revolving Auto Loan Credit Card Student Loan Other Trillions of Dollars Trillions of Dollars

Source: FRBNY Consumer Credit Panel/Equifax

2013Q1 Total: $11.23 Trillion 2013Q2 Total: $11.15 Trillion (3%) (9%) (6%) (7%) (5%) (71%)

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Mortgages among student loan borrowers age 25-30

Originations by student loan balance and delinquency status 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 debt with current 100K+ student debt with 90+ delinquent student debt

Source: FRBNY Consumer Credit Panel / Equifax; Note: delinquency is as of Q4 of previous year

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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.

Source: FRBNY Consumer Credit Panel / Equifax 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 people borrowed less in 2012 compared to 2005, but the

differences were more pronounced among borrowers with high student loan balances, likely reflecting declines in demand and access to credit.

• Student debt delinquency reduces a young borrower’s 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.

• 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

• ver 30%.
• The larger burden of student loans and higher delinquencies

may affect borrowers’ access to other types of credit and the performance of other debt.

Conclusion

for internal use only

APPENDIX

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Appendix A: Why borrow for education?

College graduates have lower unemployment rates, fare better during recessions, and enjoy wages roughly double those of high school graduates.

200 400 600 800 1000 1200 high school graduates bachelor's degree

• r higher

Median Dollars per Week

Median Weekly Earnings, 2012:Q4

Dec-2007 Dec-2007 Jun-2009 Jun-2009 Jan-2013 Jan-2013

1 2 3 4 5 6 7 8 9 10 High School Graduate Bachelor's degree Percent

Unemployment Rate

Source: Bureau of Labor Statistics

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• 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)

Appendix B: www.newyorkfed.org/householdcredit