Student Loan Borrowing and Repayment Trends, 2015 April 16, 2015 - - PowerPoint PPT Presentation

The views presented here are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of New York, or the Federal Reserve System.

Student Loan Borrowing and Repayment Trends, 2015

April 16, 2015 Andrew Haughwout, Donghoon Lee, Joelle Scally, Wilbert van der Klaauw

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• College remains a worthwhile investment for most of those who

pursue it

• Median annual earnings were $23,000 higher for bachelor’s

degree holders compared to high school graduates in 2014

• Unemployment rates for bachelor’s degree holders much lower

than high school graduates (6% vs 3.5% in 2014)

• Student loans are an important tool for financing college for

many students

• Speech by William C. Dudley, March 4 on student loans:
• “ . . .[T]here is much uncertainty and heterogeneity in outcomes,

with net returns to these human capital investments being negative for some. Understanding causes and consequences of this heterogeneity is important.”

• “How we finance post-secondary education has significant effects
• n a variety of critical economic outcomes.”

Some higher education background

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• We try to better understand student loans for two reasons:
• Student debt is large, and appears to have significant

effects on macroeconomic outcomes (household formation, homeownership, consumption)

• Good information on borrowing and repayment is necessary

to design best policies for financing this most important kind

• f investment

Researching student borrowing

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Student loans defy business cycle

100 200 300 400 500 600 700 800 900 1000 1100 1200 100 200 300 400 500 600 700 800 900 1000 1100 1200

Non

• mortgage balances

HELOC Auto Loan Student Loan Credit Card Billions of Dollars Billions of Dollars

Source: New York Fed Consumer Credit Panel / Equifax

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• During and after the Great Recession, households reduced

their other debts, but student loan balances continued to increase

• Because the majority of student loans are federal, tight bank

lending standards did not affect student loans

• The increase was a result of both increasing numbers of

borrowers and increasing average balances per borrower

• Between 2004 and 2014, there was an 89% increase in the

number of borrowers and a 77% increase in the average balance size

• College enrollment grew by 20% between 2005 and 2010 –

faster than any period since the 1970’s – and has declined slightly since

Student loans increased as other debts declined

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Total student loan balances by age group

200 400 600 800 1,000 1,200 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 under 30 30-39 40-49 50-59 60+

32%

Billions of Dollars

18% 12% 5% 33% Source: New York Fed Consumer Credit Panel / Equifax 42% 33% 14% 9% 2%

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Increases among borrowers of all ages

• Student loan balances grew for borrowers of all ages between

2004 and 2014:

• The number of borrowers over 40 increased at twice the pace of

the number of borrowers under 40

▫ Especially fast growth in balances held by for borrowers age 60+, up nearly nine-fold

• As a consequence, share of balances held by borrowers age 40+

increased from 25% to 35%

• 2/3 of student loan balances are held by borrowers not in their

20s

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Distribution of borrowers by 2014Q4 balance

Balance in 2014Q4:

20.8% 18.0% 28.5% 18.5% 7.2% 2.9% 2.4% 1.0% 0.8% ≤$5k >$5k and ≤$10k >$10k and ≤$25k >$25k and ≤$50k >$50k and ≤$75k >$75k and ≤$100k >$100k and ≤$150k >$150k and ≤$200k >$200k Source: FRBNY Consumer Credit Panel/Equifax

43.3 million borrowers Mean balance: $26,700 Median balance: $14,400

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Significant heterogeneity in amounts owed

• Most borrowers have a current outstanding balance below $25k
• About 40% owe less than $10K
• Mean outstanding balance is $26k; median balance is $15k
• Significant numbers of borrowers with large balances (over $25K)
• Borrowers in their 30’s and 40’s have the highest mean and

median balances, at about $31k and $17k respectively

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Who is borrowing now?

Source: FRBNY Consumer Credit Panel/Equifax; * excludes small number of borrowers with missing age

2 4 6 8 10 12 14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Number of originating borrowers by age*

less than 25 25-29 30-39 40+ Millions

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• The number of active student loan borrowers peaked in 2010,

at about 12 million; now down to about 9 million

• Half of active borrowers are under age 25
• After the recession, there was a slight increase in the relative

share of new borrowers in their thirties, and a decline in the share

• f 18-29 year olds
• The Department of Education estimates suggest that there was

a modest drop in enrollment between 2010 and 2013, of about 500,000 students

• More importantly, a smaller share of enrolled students has

taken out loans since 2010

• Although the number of active borrowers is declining, the

aggregate outstanding balance of borrowers overall has continued to grow as repayment rates are very low

Number of active borrowers peaked in 2010

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Increase, then decline in borrowers from lower and middle income areas

Source: FRBNY Consumer Credit Panel/Equifax; Internal Revenue Service; * excludes small number of borrowers with missing ZIP code incomes

2 4 6 8 10 12 14 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Number of originating borrowers by ZIP code income*

up to 40k 40k-60k 60k-80k 80k+ Millions

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Larger rise in level of lower income borrowers following recession

0.9 1 1.1 1.2 1.3 1.4 1.5 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Active borrowers by ZIP code income

up to 40k 40k-60k 60k-80k 80k-100k

Index, 2004=100 Source: FRBNY Consumer Credit Panel/Equifax; Internal Revenue Service; * excludes small number of borrowers with missing ZIP code incomes

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• We don’t have borrower income, so we assign borrowers to

groups based on the average income in the ZIP code they lived in when they originated their first student loan

• Income data are from IRS and refer to 2010
• Much of the change in borrowing has come from an increase,

then decrease, in the number of active borrowers from lower income areas following the recession

• More borrowers from lower and middle-income areas is

consistent with the intended purpose of student loan program: to facilitate upward income mobility

Increase, then decline in borrowers from lower and middle income areas

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• Student debt continues to increase, especially for older

borrowers

• Increase reflects new borrowers, higher balances and slow

repayment

• There is significant heterogeneity in amounts owed
• Highest balances are owed by borrowers in their 30s
• The number of active borrowers peaked in 2010
• Significant decline since then
• Increase and subsequent decline driven by borrowers from

relatively lower-income areas

Wrapping up, part 1

for internal use only

Student loan default & repayment

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Distribution of payment history

29% 34% 20% 6% 11%

Snapshot of Borrowers in 2014:Q4

always current, balance decreasing always current, balance increasing current with previous blemish now delinquent now in default

Percent of Borrowers

Source: New York Fed Consumer Credit Panel / Equifax

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• We will compare several groups to better understand the

determinants of repayment outcomes:

• Those who left school before, during, and after the Great

Recession

• Younger borrowers and older borrowers
• Borrowers from higher income and lower income areas

Understanding repayment outcomes

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Defaults and default rate

Source: FRBNY Consumer Credit Panel/Equifax

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 200 400 600 800 1,000 1,200 1,400 2003-4 2005-6 2007-8 2009-10 2011-12 2013-14

defaulted borrowers rate of default

Thousands per year Annual rate

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• The number of borrowers who default each year (defined as at

least 9 months past due) increased from about half a million ten years ago to 1.2 million annually in 2011 and 2012

• The number of borrowers who default has declined a bit in the

last two years

• The rapid increase in the defaults is partly due to the increase

in the number of borrowers, but even after accounting for the increase in the borrowers, the rate of default increased over time from 2.4% in 2004 to 3.6% in 2012

• The default rate declined somewhat after 2012 to 3.2%

Defaults and default rate

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Default rate by school leaving cohort

2009 Cohort 26% 5 years later 2007 Cohort 24% 7 years later 2005 Cohort 25% 9 years later 0% 5% 10% 15% 20% 25% 1 year later 2 years 3 years 4 years 5 years 6 years 7 years 8 years 9 years

Share ever defaulted by years after leaving school

Source: New York Fed Consumer Credit Panel / Equifax

(after entering repayment)

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Cohort default rates deteriorate

• Default rates for the 2005, 2007, and 2009 school-leaving cohorts

have all now reached roughly 25%. − Cohort default rates continue to increase even beyond the third year of loan repayment

• There is a pronounced worsening of the cohort default rate

schedules over time − Default rates are higher for later cohorts at virtually all durations

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5-year cohort default and delinquency rates by ZIP income

Source: FRBNY Consumer Credit Panel/Equifax

0% 10% 20% 30% 40% 50% 60% less than 40k 40k-60k 60k-80k 80k+

2005 school leaving cohort

0% 10% 20% 30% 40% 50% 60% less than 40k 40k-60k 60k-80k 80k+

2007 school leaving cohort

default 120+ dpd 0% 10% 20% 30% 40% 50% 60% less than 40k 40k-60k 60k-80k 80k+

2009 school leaving cohort

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Cohort default, delinquency rates by income

• Default and delinquency rates higher in lower-income areas
• Default and delinquency rates for borrowers from higher income

areas (with mean income over $60K) have remained remarkably stable across the three cohorts

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5-yr Cohort default and delinquency rates by age

Source: FRBNY Consumer Credit Panel/Equifax

0% 10% 20% 30% 40% 50% 60% less than 25 25-29 30-39 40+

2005 school leaving cohort

0% 10% 20% 30% 40% 50% 60% less than 25 25-29 30-39 40+

2007 school leaving cohort

default 120+ dpd

0% 10% 20% 30% 40% 50% 60% less than 25 25-29 30-39 40+

2009 school leaving cohort

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• The 5-year-default rate increased for all age groups, and it is

somewhat elevated for those who left school between age 30- 39

• About half of the 2009 cohort borrowers in this age range had

gone through defaults or severe delinquency in the subsequent 5 periods

Cohort default, delinquency rates by school-leaving age

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Student loan repayment behavior

delinquent or in default 17% current and paying down 37% current, same balance 13% current, balance increasing 33%

Student Loan Repayment Status in 2014

Source: New York Fed Consumer Credit Panel / Equifax

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Nearly half of borrowers are not yet repaying

• 17% of the borrowers are in default or in delinquency
• Only 37% of borrowers are current on their loan and actively

paying down

• 46% of borrowers are current on their loans but are not in

repayment

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5-year cohort repayment difficulties, by ZIP income

Source: FRBNY Consumer Credit Panel/Equifax

0% 10% 20% 30% 40% 50% 60% 70% 80% less than 40k 40k-60k 60k-80k 80k+

2007 school leaving cohort

default 120+ dpd debt increase 0% 10% 20% 30% 40% 50% 60% 70% 80% less than 40k 40k-60k 60k-80k 80k+

2009 school leaving cohort

0% 10% 20% 30% 40% 50% 60% 70% 80% less than 40k 40k-60k 60k-80k 80k+

2005 school leaving cohort

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• While default and delinquency rates were stable for higher

income area borrowers across the three cohorts, more recent cohorts from higher income areas had a larger proportion who had not paid down

• About half of the 2009 cohort are having payment difficulties on

their loans (having either defaulted, gone delinquent or made no progress paying off their balance)

• Repayment difficulties are particularly prevalent in

borrowers from lower-income areas, where about 2/3 of borrowers have had some sort of repayment difficulty

• In contrast, just over 1/3 of the borrowers from the highest

income areas have had repayment difficulties

Proportion of borrowers with payment problems by cohort and income

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2009 cohort repayment rates by income

Source: FRBNY Consumer Credit Panel/Equifax

60% 65% 70% 75% 80% 85% 90% 95% 100% 1 year 2 years 3 years 4 years 5 years

Proportion of balance remaining by ZIP income

less than 40k 40k-60k 60k-80k 80k+

(years after leaving school)

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• We look at the net progress that borrowers from each income

area have made in paying down their student loan balances

• The borrowers from the lowest income areas have made

practically no progress on paying down their loans

• The aggregate balance, five years after leaving school, is

still at 97% of where it was when they left school

• This is a sharp contrast with the borrowers from higher-

income areas, who have paid down nearly 30%

Little repayment progress by borrowers from lower-income areas

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• These results are further evidence of the important

heterogeneity we see in the outcomes of higher education investments financed with student debt

• Borrowers who left school in the Great Recession had particular

difficulty with their student loan repayment, with many defaulting, becoming seriously delinquent, or not being able to reduce their balance

• Borrowers from lower and middle-income areas as well as

borrowers who originated loans in their 30s are also at greater risk

• f default and delinquency
• The low overall repayment rate helps explain the steady growth

in aggregate student debt, now at nearly 1.2 trillion dollars

Wrapping up