An update on the staggering mass of student loan debt

How are Americans paying for higher education through student loans?  The New York Federal Reserve Bank offered an update this week.

tl;dr version: student debt continues to rise.

In detail: the total amount of student debt rose to more than $1.3 trillion.  (Have we just become used to the heap of student loan debt being greater than a trillion dollars?)   By “rose”, the NY Fed analysts mean “an increase of about 170 percent from 2006”.  The bank’s chair goes further, stating that “[s]tudent debt has increased more than fivefold over the past 14 years”.

How did this happen?  Simply put, “more students are taking out loans, the loans are for larger amounts, and the speed with which borrowers repay their debts has slowed down.”

Notice that average balance, just over $34,000.  That’s “up nearly 70% from 10 years ago”.

Repayment isn’t doing well: “the pay down progress of recent cohorts continues to decline.”

Now, the breakdown of amounts is interesting, skewed heavily by a small population:

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.

At a broader level, something very interesting is going on with the debt Americans hold.  Remember the idea back in 1990-2010, that more people should own houses?  We’re backing away from that.  Instead, “borrowers have shifted away from housing-related debt (including first mortgage and home equity lines of credit) toward auto and student loan debt.”  So we’re getting into home ownership less to a degree, especially for those who owe high student loan amounts.  Instead we’re into buying cars and university credits.  As another NYFed post puts it, “college attendees with student debt (“debt” in the rest of the post) have lower homeownership rates than their peers who do not take out debt.”

But when I say “we”, that isn’t quite accurate.  There’s a sharp class distinction:

We see a shift toward auto and student loans and away from mortgages by those from lower-income areas, whereas mortgage balances of individuals from higher income areas have nearly caught up with the 2008 peak.

So the rich continue to buy houses and more expensive properties.  For everyone else… they get cars and college time.  Escalating income inequality at work, ladies and gentlemen.

(That rising car loan bit fascinates me, since younger people are buying fewer cars.  It turns out that older people are going more deeply into debt: “borrowers age sixty and older now hold 22.5 percent of the total outstanding balances, compared to 15.9 percent in 2008; meanwhile balances held by borrowers under age fifty have declined”.  So older people owe more for cars, and younger people for higher ed, generally?)

For all kinds of debt, student loans are now the most likely to be seriously delinquent.  That wasn’t the case until very recently.  Time was credit card and mortgage debts were the hardest to repay.  Not now:

One reason for this debt-holding acceleration is, unsurprisingly, rising college costs.  Consider this data from the College Board:

Between 2011-12 and 2016-17, published tuition and fee prices rose by 9% in the public four-year sector, by 11% at public two-year colleges, and by 13% at private nonprofit four-year institutions, after adjusting for inflation.

“after adjusting for inflation” is an important detail.  It means sticker prices went up even further.

So where does this leave American higher education?  What does it tell us about the future of higher ed?

1. Unless state governments break formation and start seriously paying into public universities, the costs of the latter will keep rising, meaning debt for those students will grow further.
2. Increasing income inequality seems to play out in debt, with the poorest taking on huge loans that they struggle to repay, while the wealthiest don’t, and also buy more houses.
3. Tuition freezes seem to have done little to mitigate these trends.  Perhaps they’ll fade away.
4. The Trump administration shows no signs of taking steps to improve the situation.
5. Decreasing or plateau-level enrollment means colleges and universities will have to increase tuition and fees, which means more student debt.
6. So… expect more of this.  When should total debt crest $2 trillion, 2024?

(via Anya Kamenetz at NPR)

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