Many recent articles have focused on student loan debt, from issues with public service loan forgiveness programs to increasing rates of loan payback delinquency. For the 69 percent of U.S. students in the Class of 2018 who took out loans, the average debt load was $29,800. In Maryland, 56 percent of students in the Class of 2017 had student loans, with an average debt burden of $29,314. With approximately 44 million people in the U.S. currently owing on student loans, the topic has far-reaching consequences for many individuals.
According to the most-recent Quarterly Report on Household Debt and Credit released by the Federal Reserve Bank of New York, student loan debt totaled nearly $1.5 trillion in the fourth quarter of 2018. Student loan debt is second only to housing debt (mortgages and home equity credit lines), which were $9.5 trillion at the end of 2018 and represented 70.4 percent of all consumer debt. Student loan debt is also greater than both auto loan ($1.3 trillion/10.8 percent) and credit card debt ($0.9 trillion/6.4 percent). Since 2003, student loan debt has grown significantly as a proportion of non-housing debt, comprising 12.0 percent at the end of 2003 and reaching 36.4 percent in 2018. This growth over time is illustrated in the graph below.
While the greatest proportions of student debt is owed by borrowers aged 30-39 years (33.0 percent) and those aged 18-29 years (26.2 percent), student loan debt doesn’t affect only younger cohorts. As shown below, those 40-49 years old owe 20.8 percent of the total outstanding student loan debt, while those aged 50 years and older owe 20.0 percent. When evaluating debt as a percentage of total individual consumer debt owed, student loan debt comprises the greatest proportion of consumer debt for 18- to 29-year-olds (37.9 percent), followed by 30- to 39-year-olds (16.7 percent). While they represent a relatively small portion of those having student loan debt, it may be surprising to see individuals over 60 years old having these loan balances. These may be a result of personal use in some cases, but could also be from borrowing on behalf of children or other family members.
The proportion of student loans in serious delinquency—late by 90 days or more—has also been on the rise, reaching 11.5 percent in Q3 of 2018 and 11.4 percent in Q4 of 2018. Notably, this is not the greatest proportion in recent years—in Q4 of 2012 seriously delinquent student loans comprised 11.7 percent of the outstanding student loan balance. As the outstanding balance increases, however, the percentage equates to higher amounts of total delinquent debt. When evaluating student loan transitions into serious delinquency by age cohort, 40- to 49-year-olds had the highest rate of 10.6 percent in Q4 of 2018, followed by 30- to 39-year-olds (9.6 percent), and those over age 50 (9.3 percent). The delinquency transition rate for all ages is detailed below, as well as the total seriously delinquent balance.
So what are some of the economic consequences of this increasing debt burden? A January report released by the Federal Reserve noted a 9 percent drop in homeownership for individuals aged 24-32 between 2005 and 2014 (from approximately 45 percent to 36 percent). According to the report, it is estimated that approximately 20 percent of this homeownership decline is due to the increase in student loan debt over this time. In 2005, per capita loan debt for 24- to 32-year-olds was approximately $5,000—increasing to $10,000 by 2014. The report also notes a correlation between higher student debt loads as a young adult and lower credit scores in later years, an implication that affects not only individuals’ ability to qualify for mortgages, but also impacts other credit sources such as auto loans and credit cards.
Increased student loan burdens have also been noted as a factor in the U.S.’s declining fertility rate, which recently hit its lowest level since 1978. Of course, many other drivers of this decline have been cited—including inadequate parental leave policies in the U.S., childcare costs, and the “motherhood penalty”—just to name a few. But, over time, this reduction in fertility rate and births in the U.S. will likely impact the size of the labor pool, which can negatively impact the economic growth rate.
Individuals who are making substantial monthly student loan payment aren’t putting that money elsewhere—contributing to retirement accounts, purchasing consumer goods, or starting a business. While more difficult to quantify, the burden of student loans can also contribute to significant stress. Collectively, these points, as well as those outlined above, could put a significant drag on the economy.
So is there any good news on the horizon for student loans? A recent study from Bard College’s Levy Economics Institute found that cancelling outstanding student loan debt would increase average net worth and disposable income for households. In turn, this ability for household consumers to engage in increased consumption and investment would boost real GDP, lower the unemployment rate, and increase employment throughout the economy, with insignificant or modest impacts to inflation and government debt.
While potential large-scale policy changes in the future could ameliorate the situation, in the meantime there are some potential ways for individuals to address their student loan debt. When looking into some of these alternatives, such as public service loan forgiveness, it is critical to make sure that the borrower is meeting all requirements for the plans. As has been recently publicized, 98 percent of applicants who had applied for the Public Service Loan Forgiveness Program were rejected. In a report following a review of the program, the Government Accountability Office found that the Department of Education needed to provide clear guidance and instructions to loan servicers and their staff, clarify requirements for determining qualifying employers, and ensure that federal loan servicers have “consistent information on borrowers’ prior loan payments” to avoid miscounting errors.
As this post has illustrated, student loan debt is an issue affecting a large proportion of the U.S. population. While the full impacts of this debt burden remain to be seen, the consequences will likely be felt for decades.