Meta Brown, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw
This morning, New York Fed director of research Jamie McAndrews joined Bank economists to brief the press on economic developments. With this morning’s release of the Quarterly Report on Household Debt and Credit for 2012:Q4, the briefing focused specifically on recent developments in household debt and credit.
The first special presentation of the briefing described overall developments in household borrowing. Wilbert van der Klaauw showed that total household debt outstanding rose by $31 billion in 2012:Q4. Household debt has been falling steadily since 2008:Q3, and is now $1.3 trillion below its peak then, so the quarterly increase is noteworthy. In Q4, nonhousing debt continued its recent rise, driven by auto and student loans, and ended the year at its highest level ever—$2.75 trillion.
As discussed in an August 2012 post, mortgages have been the big driver of household debt throughout the post-2008 period of household deleveraging. In Q4, housing debt (mortgages and home equity lines of credit, or HELOCs) was roughly flat, as rising mortgage originations offset reduced HELOC balances. Given the dominance of housing-related debt on households’ credit reports, a key question going forward is whether improvements in the housing market translate into sustained increases in housing-related debt. If so, we may be witnessing the end of the period of aggregate household deleveraging. We should be able to see this more clearly over the next several quarters.
One well-established trend that continued during 2012 is the improvement in delinquency rates. Delinquency rates for most consumer loan products improved, although they worsened for student loans. The data reflect some volatility in quarterly delinquencies for individual products; the sudden drop in the HELOC delinquency rate in Q4 wasn’t due to improved borrower repayment behavior, but rather to lenders charging off a larger than usual number of delinquent loans. Nonetheless, the trend toward a lower total delinquency rate is unambiguous in the data, although consumer delinquency rates still remain far above their precrisis levels.
The unique behavior of student loans—the only type of household debt to experience steadily increasing balances and delinquency rates since 2008—merits special attention, and Donghoon Lee’s briefing presentation delved into student debt in detail.
Student loans are crucial to improving the skill level of American workers, especially in the face of rising skill premia and increased costs of higher education. Over the last eight years, aggregate educational debt outstanding has almost tripled, rising to nearly $1 trillion and becoming the largest consumer liability after mortgages. Was this dramatic increase attributable to more borrowers, or more debt per borrower? Both, as it turns out, in almost equal measure: The number of student loan borrowers and the amount each borrower owes have both risen 70 percent since 2004. An earlier post showed that a large share of student debt is in deferment or forbearance, meaning that no payments are currently due or the payments are too small to reduce the balance. As a consequence, growth in new borrowing is accompanied by low repayment rates, contributing to the upward momentum of balances.
Deferrals and forbearance also mask the true delinquency rates on student loans. Overall, about 17 percent of borrowers are at least ninety days past due on their educational debt, but when we remove the estimated 44 percent of all borrowers for whom no payment is due or the payment is too small to offset the accrued interest, the delinquency rate rises to over 30 percent. These student loan delinquencies and overall large student debt burdens could limit borrowers’ access to (and demand for) other credit, such as mortgages and auto loans. In fact, our data show that the growth in student loan balances and delinquencies was accompanied by a sharp reduction in mortgage and auto loan borrowing and other debt accumulation among younger age groups, with the decline being greater for student loan borrowers and especially so for those with larger student loan balances. In addition, we find delinquent student borrowers much more likely to be late on other debts.
Disclaimer 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.
Andrew Haughwout is a vice president in the Research and Statistics Group.
Donghoon Lee is a senior economist in the Group.
Wilbert van der Klaauw is a senior vice president in the Group.