Thursday, June 8, 2017

Snapshot of the student loan crisis from a recent New York Federal Reserve Bank report: Surprise, surprise! Debt levels Are rising

Researchers at the New York Federal Reserve Bank issued a press release on April 3 that reported on household borrowing and student debt.  Here are some excerpts from that press release. I have highlighted particularly interesting passages:
Student Loan Update 
Aggregate student loan balances have continued to increase and stood at about $1.3 trillion at the end of 2016, an increase of about 170 percent from 2006. Aggregate student debt is increasing because more students are taking out loans, the loans are for larger amounts, and the speed with which borrowers repay their debts has slowed down. New debt originations continue to increase: 2015 graduates with student loans left school with about $34,000, up from only $20,000 just ten years before. 
While about 36 percent of student debt holders owed less than $10,000, and 65 percent owed less than $25,000, only about 5 percent of student debt holders owed more than $100,000 in debt in 2016. Yet these big-balance borrowers account for nearly 30 percent of the total balances outstanding, so their outcomes and repayment success have a disproportionate influence on the overall picture.

Student loan default and delinquency rates appear to have leveled off, albeit at a relatively high level. Defaults peaked in 2012, and have stabilized since 2013; the 2009-11 cohorts saw the highest default rates, with some improvement among more recent cohorts.

We have noted in the past that delinquency and default rates are lower among higher-balance borrowers; however, the default rates among higher-balance borrowers have worsened notably in recent years. Further, payment progress is slower among those who borrowed more. Ten years later, over 70 percent of the original balance has been repaid among those who had borrowed less than $5,000 when they left college in 2006, compared to a reduction of only 25 percent among students who borrowed more than $100,000.

Higher balances, increasing participation in student loan programs, and slower repayment are pushing up aggregate student loan balances. Although defaults are improving, the pay down progress of recent cohorts continues to decline.
The Fed researchers also commented on the relationship between student-loan indebtedness and homeownership:
Homeownership 
The final portion of the press briefing was on educational attainment, student loans, and homeownership, using education records from the National Student Clearinghouse that were newly matched with credit records from the Consumer Credit Panel. These findings are presented in greater detail in a separate post. New analysis shows that college education is associated with markedly higher homeownership rates regardless of debt status, which increases at each additional level of college attainment. However, having student loans dampens homeownership rates at every level of education, and higher debt balances are associated with even lower homeownership rates.
Takeaways from the Fed researchers' findings

In essence, the Federal Reserve Bank researchers are telling us this:

Loan balances are going up, more people are taking out student loans, and repayment rates are slowing, particularly for borrowers with high loan balances. I imagine a lot of these slow paying borrowers are in the Public Service Loan Forgiveness (PSLF) program or an income-driven (IDR) plan.  

The vast majority of people making payments under  PSLF and IDR are not making payments large enough to pay down their loan balances. And, as the Fed researchers noted, among people who borrowed $100,000 or more, only 25 percent were able to pay off their student loans within 10 years.

Regarding student loans and home buying, the Fed researchers had this to say: Homeownership increases with people's education level, but student loans hamper the ability of people to buy a house, regardless of income level.

References



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