household debt and credit: student debt

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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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Overview: - 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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  • 1. Household Debt and Credit: Student Debt February 28, 2013 Donghoon LeeThe 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. 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. 2 3. Part 1: Growth of Student Loansfor internal use only3 4. Total student loan balances by age group increasing across all age groups Billions of Dollars 1,000 5%90012% 800 70017%600 50033%400 300 200 33% 100 0 200420052006 2007 2008 under 30 30-39 40-49Source: FRBNY Consumer Credit Panel / Equifax2009 50-592010 60+20112012 4 5. Non-mortgage balances Billions of Dollars 1000 HELOC 900Billions of Dollars 1000 Auto LoanStudent LoanCredit Card90080080070070060060050050040040030030020020010010000Source: FRBNY Consumer Credit Panel / EquifaxStudent 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.5 6. Distribution of student loan balance, 2012:Q4 2.2%0.9% 0.6%Balance9.0%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 / Equifax6 7. Number of borrowers and average balances per person403020Average balance per borrower Thousands of DollarsMillionsNumber of borrowers25201510 10 500Each increased by 70% between 2004 and 2012 (7% per year) Source: FRBNY Consumer Credit Panel / Equifax7 8. 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 / Equifax8 9. 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 9 10. Part 2: Student Debt Delinquency10for internal use only 11. Share of borrowers 90+ days delinquent 40% 35% 30% 25% 20% 15% 10% 5% 0% age