Tuition is rising, along with the amount of debt students are faced with after graduation from colleges and universities. How well is this debt currently being resolved? Are the repayment programs in place helping or hurting borrowers in the long run?
It is important to first understand the current state of student debt in order to prescribe the best solutions for Millennials. There is evidence that student debt is currently affecting other markets, like homeownership, but the long-term effects of prolonged, high levels of debt should be a concern for both borrowers and policy makers.
On Wednesday, February 18, Liberty Street Economics, the Federal Reserve Bank of New York’s blog, began a three-part series examining the state of student loan balances and borrower repayment difficulties. In the first post, they described the condition of the current U.S. student loan portfolio. The second post compares default rates of various groups of borrowers, and the last examines the amount of progress borrowers are making on their loans. They used data from their Consumer Credit Panel, comprised of a representative sample of anonymized Equifax credit data.
The first post stated that by 2014, student loan balances had increased from over $300 billion to nearly $1.2 trillion in just 10 years. This is due to a 92 percent increase in borrowers, and a 74 percent increase in the amount of money borrowed.
Individual borrowers rose from 42 million in 2013 to 43 million in 2014, and the average balance for these borrowers totaled around $27,000. At the low end, almost 39 percent of borrowers owe less than $10,000, but about 47 percent owe between $10,000 and $50,000. About ten percent are between $50,000 and $100,000 in debt, and the last 1.8 million borrowers owe over $100,000. About two-thirds of these borrowers are between the ages of 20 and 39.
The writers attribute the increase in student debt and individual borrowers to four main causes:
- More people are going to college (between 2000 and 2007, undergraduate enrollment increased 37 percent according to the National Center for Education Statistics).
- More students are going to graduate school and are staying in college for more time.
- It is now less expensive for parents to take out loans for their children’s education.
- The cost of a college education has increased dramatically.
The writers also note that the stock of debt is influenced by the low repayment rates. Deferments, forbearances, and payment schedules, like the Income Based Repayment program, all either lengthen the term of the loans, reduce the required payments, or both. With the addition of borrowers who are delinquent or default, the manifestation of these effects takes a toll on other seemingly distant markets.
The New York Fed found that mortgage borrowing has fallen for 30-year-olds and even more for student borrowers. The writers have evidence to believe that the growth of student debt may be having a negative impact on homeownership and household formation. They attribute poor credit, as a result of delinquency and default on student loans, to the reduction of homeownership.
Their next post aimed to magnify the characteristics of borrower distress by closely examining the ratio of defaulting borrowers in a specific cohort. To do this, the writers expanded the credit default rates, or CDRs, produced by the Department of Education. They found that default rates increased beyond the three year cutoff of the official CDRs. Therefore, instead of looking at default activity over just three years, the writers lengthened the time frame in order to obtain a more comprehensive description of the state of default ratios.
First, the writers identified borrowers that are currently in default and who have defaulted in the past. They found that 7 percent of borrowers have defaulted before, 11 percent are in default, and 37 percent of borrowers had missed at least one payment. Next, they assigned borrowers to cohorts based on the year that each student stopped taking out loans. Their findings focus on the 2005, 2007, and 2009 cohort rates.
In all three cohorts, about 25 percent of borrowers had defaulted by the fourth quarter of 2014. The writers also found that any given cohort default rate increases more rapidly than the cohort before it. For example, the 2009 cohort default rate surpassed both the 2005 and 2007 cohort default rates.
In addition, the writers also found that default rates are actually higher among low-balance borrowers than high-balance borrowers. Borrowers owing less than $5,000 have the highest default rates at 34 percent. Borrowers owing $100,000 or more have an 18 percent default rate, almost half the low-balance default rate. The last finding from the report shows that only 63 percent of borrowers somehow managed to avoid both default and delinquency altogether.
The last post in the blog series looks at how much progress borrowers are making on their student loans. The writers first take a snapshot of the 2014 fourth quarter data. They find that 17 percent of those borrowers are at least 90 days delinquent, while 37 percent are current and reducing their balances. Thirteen percent are also current, but have the same balance as the previous quarter.
However, 33 percent of borrowers are current, but have higher balances than in the previous quarter. Next, the writers looked at these four characteristics of borrowers within the 2009 cohort from their previous report. They found that 22 percent of high-balance borrowers have balances that are higher in 2014 than in 2009, and that higher original debt generally leads to the occurrence of growing balances.
Growing balances result from borrowers making payments that are less than their accruing interest, because of programs like deferments, income-based repayment plans, and forbearances. These instances are leaving borrowers with more debt for a longer period of time. The effects can be seen in the housing market, mentioned in the writers’ first blog post, and in the increase of parental co-residence among Millennials. It is important to consider the wider frame when assessing the effects of student debt and payment programs.