Grading Student Loans
and Wilbert van der Klaauw
Student loans support the education of millions of students nationwide, yet much is unknown about the student loan market. Relevant data are limited and, for the most part, anecdotal. Also, sources tend to focus on recent college graduates and do not reveal much information about the indebtedness of parents, graduate students, and those who drop out of school.
To inform the public and policymakers, we devote this post to some new findings obtained from the FRBNY Consumer Credit Panel, a unique and nationally representative data set sourced from Equifax credit reports. The FRBNY Consumer Credit Panel has made possible our Quarterly Report on Household Debt and Credit, first issued in the second quarter of 2010. We will examine the overall student loan debt market as of third-quarter 2011, giving particular attention to changes from the second to the third quarter and highlighting new findings by age group as well.
The outstanding student loan balance now stands at about $870 billion,1 surpassing the total credit card balance ($693 billion) and the total auto loan balance ($730 billion). With college enrollments increasing and the costs of attendance rising, this balance is expected to continue its upward trend. Further, unlike other types of household debt such as credit cards and auto loans, the student loan market is incredibly complex. Numerous players and institutions hold stakes at each level of the market, including federal and state governments, colleges and universities, financial institutions, students and their families, and numerous servicers and guarantee facilitators.
Student loans have received considerable media attention in recent months as researchers and policymakers voice growing concern about the heavy debt loads assumed by students and their parents. In addition to worries about the volume of outstanding student debt, there is concern about having enough federal aid to support the large number of students taking up postsecondary education. Federal and state governments are deeply involved in the student loan market, either directly originating student loans or indirectly guaranteeing them. The Health Care and Education Reconciliation Act, signed into law last year, ended private lending of federally subsidized loans, approved expansion of Pell Grants, and appropriated funds to invest in institutions that serve minority and low-income populations. Still, advocates for students clamor for more to be done to increase the availability of student loans. Further, state budget cutbacks to higher education amid tight fiscal circumstances may result in higher tuition.
In October 2011, President Obama announced executive actions to cap monthly federal student loan repayment at 10 percent of discretionary income for college graduates, eased from the previous 15 percent. This cap comes as some relief to those who worry about how they will pay back their debt. Moreover, student loan debts are typically shouldered by recent college graduates and other young workers, who tend to face lower incomes and higher rates of unemployment than older cohorts.
From the second to the third quarter of 2011, the total outstanding student loan balance grew 2.1 percent, from $852 billion to $870 billion. Over the same time period, other types of consumer debt declined or remained flat. Of the 241 million people in the United States who have a credit report with Equifax, our data provider, about 15.4 percent—or 37 million—hold outstanding student loan debt. The student loan debt, however, is not evenly distributed across the general population. Among people under thirty years old, 40.1 percent have outstanding student loan debt. Among people between the ages of thirty and thirty-nine, 25.1 percent have outstanding student loan debt. In contrast, only 7.4 percent of people who are at least forty years old have outstanding student loan debt. As a result, $580 billion of the total $870 billion in student loan debt is owed by people younger than forty (see charts below).
The average outstanding student loan balance per borrower is $23,300. Again, there is substantial heterogeneity in balances of individual borrowers. The median balance of $12,800 is roughly half the average level, which indicates that a small fraction of people have balances significantly higher than the median. About one-quarter of borrowers owe more than $28,000; about 10 percent of borrowers owe more than $54,000. The proportion of borrowers who owe more than $100,000 is 3.1 percent, and 0.45 percent of borrowers, or 167,000 people, owe more than $200,000. The distribution also varies by age group: for example, borrowers between the ages of thirty and thirty-nine have the highest average outstanding student loan balance, at $28,500, followed by borrowers between the ages of forty and forty-nine, whose average outstanding balance is $26,000 (see chart below).
How much difficulty are borrowers having paying back their debts? Of the 37 million borrowers who have outstanding student loan balances as of third-quarter 2011, 14.4 percent, or about 5.4 million borrowers, have at least one past due student loan account. Together, these past due balances sum to $85 billion, or roughly 10 percent of the total outstanding student loan balance. To put this in perspective, the same 10 percent rate applies on average to other types of household delinquent debt, including mortgages, credit cards, and auto loans. Does this mean that the prospects for student loan delinquencies are similar to those for the household debt in general, and thus no special attention is warranted? (See chart below.)
Unfortunately, this is not the case—some special accounting used for student loans, not applicable to other types of consumer debt, makes it likely that the delinquency rates for student loans are understated. In the case of federally backed loans, which represent a majority of total lending, repayment is deferred until the student graduates from school and can then be pushed back by another six-month grace period. How do these student loans in deferment or grace periods show up on credit reports and contribute to the delinquency statistics? Given that no payment is necessary until graduation, these deferred student loans are not included in the past due balance but they are included in the total balance from which the delinquency rate is derived. This may help explain the low proportion (12.6 percent) of borrowers with past due student loans among those under thirty years old, compared with 16.9 percent among those between the ages of thirty and thirty-nine, since many of the younger borrowers are still in school and don’t yet have to make any payments.
To address this potential bias in calculating delinquency statistics, we exclude individuals who appear to be temporarily exempt from making payments because they are in school or newly graduated from school. These are students who, as of third-quarter 2011, owed as much as or more than they did in the previous quarter while maintaining a zero past due balance. We will be able to make our inference more precise when loan-level panel data are available, but this is our first-cut analysis given the available data. We warn that there is room for misclassification in this analysis. For example, there could be borrowers who are subject to the income-based repayment plan whose payment fell short of the accrued interest, resulting in a balance that increased. Recall that this exercise looks at the student loan borrowers who have a balance as of third-quarter 2011; therefore, those who had taken out a loan at one point but paid it off before third-quarter 2011 are not accounted for.
From this exercise, we find that as many as 47 percent of student loan borrowers appear to be in deferral or forbearance periods, and thus did not have to make payments as of third-quarter 2011. Specifically, 17.6 percent of borrowers had exactly the same balance in the third quarter as in the second quarter of this year, and 29.1 percent increased their overall student loan balance by taking on new originations or accruing interest to the balance.
We then recalculate the proportion of borrowers with a past due balance excluding this group of borrowers. We find that 27 percent of the borrowers have past due balances, while the adjusted proportion of outstanding student loan balances that is delinquent is 21 percent—much higher than the unadjusted rates of 14.4 percent and 10 percent, respectively (see charts below).
In sum, student loan debt is not just a concern for the young. Parents and the federal government shoulder a substantial part of the postsecondary education bill. Moreover, the student loan delinquency picture is not fully captured in the broad statistics since a significant proportion of borrowers and balances are not yet in the repayment cycle. The implications of this last fact for future changes in the student loan delinquency rate are a very important area of research.
Given that student loans are an indispensable tool for educational advancement, this form of debt will remain a critical policy focus for generations to come. Going forward, we will continue to monitor the student loan market with new data each quarter, and we will try to provide useful information on the landscape of student debt.
1The marginal difference between this figure and the student loan balance found in the Quarterly Report on Household Debt and Credit can be attributed to the difference in the size of the sample used to calculate the two unique figures.
*Maricar Mabutas is an assistant economist in the Research and Statistics Group.
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.