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CASCADE FoCuS PUBLISHED BY THE COMMUNITY DEVELOPMENT STUDIES & EDUCATION DEPARTMENT OF THE FEDERAL RESERVE BANK OF PHILADELPHIA
April 2014
Highlights
• ThestudentloanmarketintheThirdFederalReserveDistricthasgrownconsiderablyinrecentyears,intermsofboththenumberofborrowersandtheaggregateamountofoutstandingdebt.
• Borrowerbalancesaretypicallyhigherinupper-incomethaninlower-incomeneighborhoods,butloanperformance,asmeasuredbylowerdelinquencyrates,isstrongerinhigher-incomeneighborhoods.
• Theborrowerswiththehighestdelinquencyratesarethosewithbalancesoflessthan$13,000.
• Theproportionofthepopulationholdingstudentloanshasincreasedforallagegroups;whiletheyoungaremorelikelytotakeoutstudentloans,themedianbalanceforborrowersisfairlysimilaracrossagegroups.
Student Loan Trends in the Third FederalReserve DistrictBy Thomas Hylands*
*TheauthorthanksKeithWardrip,RobertHunt,andWenliLifortheircommentsandguidance.PleasedirectquestionsandcommentstoKeithWardrip,CommunityDevelopmentStudiesandEducationDepartment,FederalReserveBankofPhiladelphia,atkeith.wardrip@phil.frb.org.
1SeeAppendix1foraprimeronthestructureofandrecentdevelopmentsinthestudentloanmarket.
Thestateofthestudentloanmarkethasreceivedmuchattentioninrecentyears,asthenumberofborrowersandtheircollectivedebthaverisendramatically.Theseincreaseshavebeenparticularlyproblematicinthewakeofthe2007–09recessionbecauseincreasedunemploymentandsuppressedincomeimpairborrowers’abilitytomakepaymentsontheirloans.ThisreportoutlinestherecenthistoryofstudentborrowingintheThirdFederalReserveDistrict,whichcoverseasternandcentralPennsylvania,southernNewJersey,andDelaware,andexploreslendingpatterns,bytheneighborhoodincomeoftheborrower,tobetterunderstandtheimplicationsforlow-andmoderate-incomecommunities.
Borrowingtofinanceeducationisnotanewpractice,butithasbecomeincreasinglycommoninrecentyears.1Whenlookingforcauses,anobviousplacetostartistheincreasingcostofhighereducation.Figure1showstheaveragecostforayearofundergraduateeducation,includingtuition,fees,androomandboard,andhowthatcostwasfinanced
bytheaveragestudentbetweenthe1990–91and2011–12academicyears.Duringtheearlystagesofthatperiod,thecostwaslargelypaidforthroughout-of-pocketexpenditures—forexample,savings,employmentwhileattendingcollege,oraformofcreditotherthanastudentloan—andasignificantportionwasalsocoveredbygrantaid.Thosesourceswereunabletocompletelyabsorbtherisingcostofeducation,however,asout-of-pocketexpendituresfellinrealtermsby$900.Bythe2011–12
academicyear,despitegrantaidincreasingbymorethan$5,000perstudentonaverage,loansforthetypicalstudentrosefrom$1,700to$5,700tomakeuptheshortfall.Theproblemwaslikelyexacerbatedbytherecentfinancialcrisis,whichformanyfamilieserodedsavingsandlimitedtheiraccesstootherformsofcredit(suchashomeequityloans)thatmightotherwisehavebeenputtowardpayingforeducation.Thus,therisingcostsofhighereducation,thefallingportionof
Cascade Focus is published by the Community Development Studies and Education Department at the Federal Reserve Bank of Philadelphia and is available online at http://www.philadelphiafed.org/community-development/publications/.
Cascade Focus summarizes the department’s research on issues related to community development in low- and moderate-income communities and fair and impartial access to credit in underserved markets. The views expressed in this publication are those of the author(s) and do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. No statements in this paper should be treated as legal advice.
This publication may be reprinted or abstracted with permission from the department and with proper attribution. FEDERAL RESERVE BANK OF PHILADELPHIA
thosecostscoveredbyout-of-pocketexpenditures,andrisingcollegeenrollmentthroughthesameperiod2havefedthestudentborrowingboom.
Doesitmatterifstudentsareborrowingmore?Istheincreaseddebtaproblem?Theargumentcanbemadethatmorepeopleattendingcollegemeansamoreeducatedandproductiveworkforce,andthereisampleevidencethat,atanindividuallevel,collegecanbeaverygoodinvestment.3Thiscouldmeanthatindividualsandthemacroeconomybenefitfromincreasedstudentborrowinginthelongrun.However,intheshortrun,borrowersmayhavetoreduceexpendituresonothergoodsandservicesinordertofinancetheireducation,andthosewhofallintodelinquencywillhaverestrictedaccesstootherformsofcreditinthefuture.
A2012RutgersUniversitystudyfoundthatrecentgraduateswithstudentloanshavemadesignificantlifestylechoices,includingshort-termdecisionslikemovinginwithfamilytoreducecosts(27percentofstudentssurveyed)ortakinglessdesirablejobstohelppayofftheirloans(25percent),aswellasmajorlifedecisionssuchasdelayingmarriageorothercommittedrelationships(14percent),puttingoffcontinuing
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Figure 1Financing the Average Cost for One Year of Undergraduate Education (constant 2012 dollars)
ThechartisadaptedfromworkbytheHamiltonProject.aCostdataincludetuition,fees,androomandboard.bGrantaidincludesfederalgrants,educationtaxbenefits,FederalWorkStudyincome,stategrants,institutionalgrants,andprivateandemployergrants.cStudentloansincludefederalandnonfederalloans.cOut-of-pocketexpensesaretotalcostsminusgrantaidminusstudentloans.d
aMichaelGreenstoneandAdamLooney,“RisingStudentDebtBurdens:FactorsBehindthePhenomenon,”TheHamiltonProject,2013,availableathttp://ow.ly/thmiU(accessedMarch24,2014).
bU.S.DepartmentofEducation,NationalCenterforEducationStatistics,“DigestofEducationStatistics:2012,”2012,availableathttp://ow.ly/thmtr(accessedMarch24,2014).
cCollegeBoard,“TrendsinStudentAid2013,”2013,availableathttp://ow.ly/th98R(accessedMarch24,2014).
dMoreinformationonthemethodisavailablefromtheoriginalauthorsathttp://ow.ly/thigg(accessedMarch24,2014).
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GRANT AID
STUDENT LOANS
OUT OF POCKET
’ ’ ’ ’ ’ ’ ’90-’91 92-’93 94-’95 96-’97 98-’99 00-’01 02-’03 ’04-’05 ’06-’07 ’08-’09 ’10-’11
2U.S.CensusBureau,“NumberEnrolledinCollegebyTypeofSchoolandEnrollmentStatus,1970to2012,”2013,availableatwww.census.gov/hhes/school/data/cps/historical/FigureA-7_2012.pdf(accessedNovember6,2013).
3SandyBaum,JenniferMa,andKathleenPayea,“EducationPays2013,”CollegeBoard,2013;AnthonyP.Carnevale,StephenJ.Rose,andBanCheah,“TheCollegePayoff,”GeorgetownUniversityCenteronEducationandtheWorkforce,2013.Itisworthnoting,however,thatwhilecollegegraduatesasagroupgenerallyearnmorethanthosewithlowerlevelsofformaleducation,thereisnoguaranteethatcollegewillpayoffforanygivengraduate,asoutcomescanvarydramaticallybytypeofacademicinstitution(KevinLangandRussellWeinstein,“EvaluatingStudentOutcomesatFor-ProfitColleges,”NationalBureauofEconomicResearch,2012),fieldofstudy(AnthonyP.CarnevaleandBanCheah,“HardTimes:CollegeMajors,Unemployment,andEarnings,”GeorgetownUniversityCenteronEducationandtheWorkforce,2013),andotherfactors.
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education(28percent),anddelayingmajorpurchasessuchascarsandhouses(40percent).4Similarly,theFederalReserveBankofNewYorkhasdocumentedasharpreductioninhome-secureddebtatage30andinautodebtatage25amongstudentborrowers,tothepointthatuseofthosecredittypesatthoseagesisnowlowerforthosewithstudentdebtthanthosewithout.5Inadditiontorestricteduseofotherformsofcredit,householdscarryingstudentloandebthavealowernetworththanthosewithoutstudentloans,evenaftercontrollingforageandotherdemographicfactors,whichaffectstheirshort-termfinancialhealth.6Thesefactorsmayhaverippleeffectsovertimethataffectindividualborrowersandthemacroeconomyinthelongterm,particularlyifalargeproportionofborrowersarenotabletomaketherequiredpaymentsontheirloans.
StudentslivingintheThirdFederalReserveDistricthavenotbeenimmunetothecostpressureslaidoutinFigure1.Indeed,allthreestatesintheDistricthavesignificantlycutbackonappropriationsforhighereducationinrecentyears,andtheirpublicuniversitiescurrentlyrankassomeofthemostexpensiveinthe
country(Table1).7Risingcosts,andtheimplicationsforstudentloandebt,areparticularlyrelevantforlow-andmoderate-incomestudents,sinceamongstudentswhostartaprogramatafour-yearinstitution,thosefromthelowest-incomequartilehaveamuchlowerrateofattainmentofanydegree(50percent)thanthosefromthesecond(61percent),third(67percent),andhighest(77percent)quartiles.8Asimilarpatternisseenforstudentsattwo-yearinstitutions,butwithlowercompletionratesacrosstheboard.Failingtocompleteanydegreeisabigobstacletoloan
repaymentbecauseanydebtthatthestudentincursisnotoffsetbygreaterearningpower.Asaresult,thosewhodonotcompletetheirdegreearemorelikelytobeunemployed9andtodefaultontheirloans10thanthosewhodograduate.
ThisreportprovidesananalysisofstudentloandebtintheThirdFederalReserveDistrictusingdatafromoneofthenation’sthreemajorconsumercreditbureaus.Thereportfocusesonaggregateandmedianstudentdebtlevelsanddelinquencyratesbetween2005and2013and
Table 1Higher Education Costs and Funding in Third District States
Average Annual Cost of Tuition and Fees at a
Four-Year Public Institution (National Rank)
Change in StateHigher Education
Appropriations, 2007-12(National Rank)
Delaware $10,890(7) -25.9%(27)
New Jersey $12,399(3) -22.6%(24)
Pennsylvania $12,330(4) -31.7%(41)
U.S. $8,655(--) -23.0%(--)
Sources:CollegeBoard,“TrendsinCollegePricing2013,”2013(costs);StateHigherEducationExecutiveOfficers,“StateHigherEducationFinanceFY2012,”2013(appropriations).
4CharleyStone,CarlVanHorn,andCliffZukin,“ChasingtheAmericanDream:RecentCollegeGraduatesandtheGreatRecession,”RutgersUniversityJohnJ.HeldrichCenterforWorkforceDevelopment,2012.
5FederalReserveBankofNewYork,LibertyStreetEconomicsBlog,“YoungStudentLoanBorrowersRetreatfromHousingandAutoMarkets,”2013,availableathttp://ow.ly/uUKEi(accessedMarch24,2014).
6WilliamElliottandIlSungNam,“IsStudentDebtJeopardizingtheShort-TermFinancialHealthofU.S.Households?”FederalReserveBankofSt.LouisReview,2013.
7TheCenteronBudgetandPolicyPrioritiesreportsthatstateshavebothincreasedpublicuniversitytuitionandcutspendingonhighereducation,ofteninwaysthatdiminishthequalityofeducation,inordertomakeuptheshortfallfromstateappropriationreductions(PhilOliff,VincentPalacios,IngridJohnson,andMichaelLeachman,“RecentDeepStateHigherEducationCutsMayHarmStudentsandtheEconomyforYearstoCome,”CenteronBudgetandPolicyPriorities,2013).
8U.S.DepartmentofEducation,NationalCenterforEducationStatistics,“DigestofEducationStatistics:2011,”2011,availableathttp://nces.ed.gov/programs/digest/d11/tables/dt11_347.asp(accessedNovember6,2013).
9U.S.DepartmentofLabor,BureauofLaborStatistics,“EarningsandUnemploymentRatesbyEducationalAttainment,”2013,availableathttp://www.bls.gov/emp/ep_chart_001.htm(accessedNovember6,2013).
10MaryNguyen,“DegreelessinDebt:WhatHappenstoBorrowersWhoDropOut,”Education Sector Brief,2012.
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investigateswhetherdifferencesinthereportedtrendsemergewhenexploredbytheborrower’sneighborhoodincomelevel.11
Data
ThisstudyusesdatafromtheFederalReserveBankofNewYorkConsumerCreditPanel/Equifax(CCP).TheCCPisananonymous,nationallyrepre-sentativerandom5percentsampleoftheU.S.populationwithaSocialSecuritynumberandacredithis-tory.12TheCCPincludesquarterlydataoneachindividualstudentloanthatapanelisthastakenout,upto20loansperpanelist.Thestudyperiodcoversthefirstquarterof2005tothesecondquarterof2013andislimitedtoborrowersintheThirdFederalReserveDistrict.Alldollarfiguresarereportedinnominalvalues.
TheCCPdoesnotcontainpanelistincomedata,butitdoesincludethecensustractofthepanelist’sreportedresidence.InconjunctionwithdatafromtheAmericanCommunitySurvey(ACS),thisallowstheassign-mentofpaneliststoaneighborhoodincomecategoryaccordingtotheratioofthemedianfamilyincome(MFI)ofthecensustracttothatofthelocalmetropolitanstatisticalarea,themetropolitandivision,ortheMFIofthenonmetropolitanportionof
thestate.13Thelow-incomecategoryincludescensustractswithanMFIthatislessthan50percentoftheareaMFI;moderate-incometractsfallbetween50percentand79percentoftheareaMFI;middle-incometractsrangefrom80percentto119percentoftheareaMFI;andtheupper-incomecategoryincludestractswithanMFIof120percentoftheareaMFIorhigher.
Notethatwhiletheassignedincomecategoryofagivencensustractisheldconstantthroughoutthestudyperiod,theincomecategoryassignedtoaborroweriscontemporaneouswithhisorherresidenceineachquarter;thus,aborrower’sincomecategorycanchangefromquartertoquarteriftheborrower’saddressonfilewiththecreditbureauchanges.14MoreinformationonthedataandmethodsisavailableinAppendix2.
Thefollowinganalysispresentsestimatesofstudentloandebtand
loanperformanceforpanelistsineachneighborhoodincomegroupandforborrowersintheThirdDistrictasawhole.
Market Overview
Bymostmeasures,thestudentloanmarkethaschangeddramaticallysince2005.IntheThirdDistrict,thenumberofborrowersrosefromjustover1.1million(11.5percentoftheCCP)atthestartof2005tojustunder1.8million(17.5percentoftheCCP)inthesecondquarterof2013,andtheaggregatestudentloandebtin-creasedfrom$18billiontomorethan$46.5billionduringthesameperiod(Figure2).Theseincreaseswerefairlysteadythroughout,suggestingnoobviousimpactfromthecreditcrisisthataffectedotherformsofcredit.15Thismaybebecause1)studentloansdonothavestrictunderwritingre-quirementslikeothertypesofloans,2)furthereducationcouldhelpputoffentryintoadifficultlabormarket,
11Forasimilarstudyusingthesamedatasetatthenationallevelbutignoringtheneighborhoodincomelevelofborrowers,seeWenliLi,“TheEconomicsofStudentLoanBorrowingandRepayment,”FederalReserveBankofPhiladelphiaBusiness Review(ThirdQuarter2013).
12Selectionintothesampleispredicatedonthelasttwodigitsofanindividual’sSocialSecuritynumber,whichisnotincludedinthedatasetusedforanalysis.About8percentofhouseholdsdonothaveamemberwithacreditreportandarethusnotincludedinthedataset(MetaBrown,AndrewHaughwout,DonghoonLee,andWilbertvanderKlaauw,“DoWeKnowWhatWeOwe?AComparisonofBorrower-andLender-ReportedConsumerDebt,”FederalReserveBankofNewYorkStaff Report523,2013).
13Theincomedatacomefromthefive-yearACSestimatesfor2005–09.Toensureconsistency,themetropolitanareadefinitionsadoptedforthereleaseofthe2005–09ACSdataanddefinedintheNovember2008OfficeofManagementandBudgetBulletinNo.09-01areusedthroughout,andtheneighborhood’sassignedincomecategoryisusedfortheentirestudyperiod.
14Theincomecategoryassignedtocurrentstudentsmaynotaccuratelyreflecttheirsocioeconomicstatus,dependingonwhethertheyuseacollegeaddressorhomeaddressforbillingpurposes;iftheyuseacollegeaddress,theincomecategorywillreflecttheeconomicconditionsintheareaaroundtheircollege.Itisthereforequitepossiblethattheneighborhoodincomeclassificationofcurrentstudentswillchangewhentheyleavecollege.However,theinclusionofcurrentstudentsdoesnotsubstantiallyaffecttheresultsforneighborhoodincomecategoriespresentedinthispaper,asexplainedfurtherinAppendix2.
15FederalReserveBankofNewYork,ResearchandStatisticsGroup,MicroeconomicStudies,“QuarterlyReportonHouseholdDebtandCredit,August2013,”2013,availableatwww.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q22013.pdf(accessedNovember6,2013).
Compared with the U.S.Residents of the Third District are more likely to have student loans than residents of the U.S. as a whole: Nearly 18 percent of Third District panelists reported student loans in the second quarter of 2013, versus 16 percent nationally.
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and3)theweakeconomyreducedtheopportunitycostofhighereducation.
Whileitisclearthatthemarketgrewsubstantially,therewasrelativelylit-tlechangeintheincomedistributionoftheborrowerswhenmeasuredbyneighborhoodincome.Thepropor-tionsofborrowersandaggregatestu-dentloandebtassociatedwitheachincomegroupvariedbyonlyafewpercentagepointsacrossallquartersand,generallyspeaking,reflectedthedistributionoftheoverallpopula-tion:The6percentofthepopulationthatlivedinneighborhoodsclassi-fiedaslowincomeinthe2010censusaccountedfor7percentofaggregateoutstandingstudentloandebtand8percentofstudentloanborrowersthroughoutthestudyperiod,whilethe28percentofthepopulationinupper-incomeneighborhoodscon-tributed25percentofborrowersand29percentofaggregatedebt(Table2).
Themuchsharperincreaseinag-gregatestudentloandebtthaninthenumberofborrowers(Figure2)indicatesthatdebtforthetypicalborrowerwasincreasingthrough-outthestudyperiod:Themedianbalanceamongallborrowersgrewsteadilyfromastartingpointof$9,500to$16,900inthemostrecentquarter(Figure3).Theincreasewasparticularlylargeforthosefromupper-incomeneighborhoods,wherethemedianbalancestoodat$19,500(anincreaseof$8,300,or74percent,sincethestartof2005).Althoughthepercentageincreasewasactuallygreater(85percent)overtheperiodinlow-incomeneighborhoods,theme-dianbalanceattheendoftheperiod($12,300)andtheincreaseovertheperiod($5,700)werebothsubstantial-lylower.Figure4furtherillustratesthepointthatrelativelylowstudentloanbalancesarecharacteristicoflow-andmoderate-incomeneighbor-hoods,whilebalancesinexcessof$20,000aremorecommoninmiddle-andupper-incomeneighborhoods.
Delinquency
Undertherightcircumstances,fund-ingone’seducationbytakingonstudentloandebtisnotnecessarilyproblematic.Asdiscussedearlier,educationistypicallyagoodinvest-mentthatoftenpaysdividendsintheformofhigherlifetimeearnings.Problemsarisewhentheseexpectedhigherearningsdonotmaterialize
—becauseofaneconomicdownturnorbecausethedegreewasnotcom-pleted,forexample—andborrowersarenotabletomeettheirloanobliga-tions.Whenborrowersfallbehindonpaymentsfortheirloan,theyareconsidereddelinquent,whichcanreducetheircreditscoresandrestrictfutureaccesstootherformsofcredit(e.g.,creditcardsandmortgages).Inthisreport,delinquencyisdefinedas
Table 2Distribution of Borrowers with Student Loan Debt and Aggregate Student Loan Debt, by Neighborhood Income, Second Quarter 2013
Income Population Borrowers Aggregate Debt
Low 6% 8% 7%
Moderate 21% 17% 16%
Middle 46% 49% 48%
Upper 28% 25% 29%
Sources:U.S.CensusBureau,2010(population);FederalReserveBankofNewYorkConsumerCreditPanel/Equifax(borrowersandaggregatedebt).
Columnsmaynotsumto100percentduetorounding.
Figure 2Aggregate Student Loan Debt (nominal dollars) and Number of Borrowers with at Least One Student Loan
Somevariationinthedataoccursbecauseofoccasionalreportinggapsbyloanservicerstothecreditbureau.Thethirdquarterof2007isthemostprominentexample:Thedipsinbothlinesoccurbecausealargeservicerfailedtoprovidethenecessaryinformationintime,ratherthanbecauseofasuddendeclineinaggregatestudentloandebtandborrowers.
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Figure 3Median Student Loan Balance (nominal dollars), byNeighborhood Income
Figure 4 Distribution of Borrowers in the Second Quarter of 2013,by Balance and Neighborhood Income
Compared with the U.S.Third District residents borrow more to pay for their education: The median balance held by a student loan borrower from the Third District was $16,900 in the second quarter of 2013, higher than the national median of $15,800.
aloanbeing1)pastdueby90ormoredays,2)incollections,or3)chargedoff.Whenthishappenstomanybor-rowersatthesametime,therecanbenegativerepercussionsfortheloanmarketandfortheeconomymorebroadly.
Figure5showsthedelinquencyratebyneighborhoodincome,calculatedasthenumberofborrowersdelin-quentonatleastonestudentloanasapercentageofallborrowerswithanystudentloandebt.Unlikeotherformsofcredit,studentloanscomewithstipulationsthatmakecalculat-ingtheirdelinquencyratedifficult.Studentsarenotrequiredtorepayloanswhiletheyareenrolledatleasthalf-timeincollege,and,depend-ingontheirloanproduct,theymayreceiveagraceperiodafterleavingschoolbeforepaymentsmuststart.Ideally,thedelinquencyratewouldbecalculatedonlyforborrowerswhohaveleftschoolorenteredtherepay-mentperiod,buttheCCPdoesnotincludeinformationonenrollmentstatusorgraceperiods.Accordingly,thedelinquencyratespresentedherearecalculatedforallborrowerswithoutstandingstudentloans.
Asaresult,theseestimatesshouldbeconsideredconservative:Thetruerateislikelysomewhathigher.How-ever,theestimatesincludeloansthathavebeenchargedoffbutthatcanremainonaborrower’screditreportforuptosevenyears,aprocessthatcaninflatethedelinquencyestimatesrelativetoothersources.Forthesereasons,andbecausetheseratesreflectthepercentageofdelinquentborrowersratherthantheshareofdelinquentloansorthedelinquentloanbalance,theestimatesgivenheremaynotbedirectlycomparabletootherpublishedrates.
Acrossallincomegroups,thedelinquencyratefluctuatedthroughoutthestudyperiodbutmaintainedasteadyincreaseuntil
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Source:FederalReserveBankofNewYorkConsumerCreditPanel/Equifax
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thethirdquarterof2012,whenasignificantnumberofloansweretransferredfromoneservicertoanother.Itappearsthatdifferencesinthereportingpracticesbetweentheseservicerscontributedtoadiscontinuousjumpinthecountofstudentloansthatappearinourdata.ManyoftheseloanswereoriginatedinearlierperiodsandmanywerealsodelinquentatthetimetheyfirstappearedintheCCP.Inthesecondquarterof2013,theoveralldelinquencyratewas15percent,afigureheavilyweightedbythelargenumberofborrowerslivinginmiddle-andupper-incomeneighborhoodsthatgenerallyexhibitrelativelystrongloanperformance.Inthesamequarter,theratewas33percentforborrowersinlow-incomeneighborhoods.Inotherwords,oneoutofeverythreestudentloanborrowerslivinginalow-incomeneighborhoodwas90ormoredaysdelinquentonatleastoneloan.
Inadditiontobecomingdelinquentatahigherratethanpreviously,today’sborrowersaredoingsomorequickly,particularlythoseborrowersinlower-incomeneighborhoods.Amongallborrowerswhobecomedelinquentforthefirsttimeonastudentloan,themeannumberofmonthsbetweentakingouttheirlaststudentloanbeforebecomingdelinquentonanystudentloanandthedateofthatfirstdelinquency16fellfromjustover39monthstojustunder33duringthestudyperiod(astatisticallysignificantdecrease).Higherneighborhoodincomeis
associatedwithalongerdurationofloanrepaymentbeforedelinquency,buttherewasasimilardeclineforallincomegroups.Inthesecondquarterof2013,adelinquentborrowerfromalow-incomeneighborhoodreacheddelinquencymorequicklythanadelinquentborrowerfromanupper-incomeneighborhood(30monthsversusalmost35,astatisticallysignificantdifference).17
Apopularmedianarrativeisthatstudentswithlargedebtburdensgraduatefromcollegeandfindthemselvesstrugglingtopayofftheirloans.However,thisglossesoverthefactthatmostborrowerswhobecomedelinquentontheirloanshaverela-tivelylowbalancescomparedwiththosequotedinthepopularpress.18Figure6mapsoutthedistributionofallborrowersandthatofalldelin-
Figure 5Student Loan Borrower Delinquency Rate,*by Neighborhood Income
*Borrowerswithatleastonestudentloanthatis90ormoredayspastdue,incollections,orchargedoffasapercentageofallborrowerswithanystudentloandebt.
16Ratherthanusetheoriginationdateofthedelinquentloan,inthiscalculationIusetheoriginationdateofthelaststudentloantakenoutbytheborrowerbeforethedelinquencybecausethisisclosertothedateatwhichtheborrowerenterstheloanrepaymentperiod.Usingtheoriginationdateofearlierloanswouldincludeagreaterportionofthegraceperiodandthusoverestimatethetimeuntildelinquency.
17Notethatallthesefiguresreflectthetimebetweenborrowerstakingouttheirlastloanandbecomingdelinquentonanyoftheirloans.Federalloansdonotrequirerepaymentwhileastudentisenrolledatleasthalf-timeincollege,andmostalsooffertheborrowerasix-tonine-monthgraceperiodafterleavingschoolbeforepaymentisdue.Furthermore,tobeconsidereddelinquentinthisanalysis,aborrowermustbeatleast90daysbehindonpayments.Withthesecaveatsinmind,itislikelythattheactualnumberofmonthsthatstudentsarestayingcurrentontheirloansislowerthantheestimatesindicate.
18See,forexample,RuthSimon,“Student-LoanLoadKillsStartupDreams,”Wall Street Journal,August14,2013;AndrewMartinandAndrewW.Lehren,“AGenerationHobbledbytheSoaringCostofCollege,”New York Times,May12,2012;andRonaldD.White,“LawSchoolGradLearnsHowtoPayOffaHeavyDebt,” Los Angeles Times,September20,2013.
Compared with the U.S.Third District residents are managing their loans better than borrowers elsewhere: The Third District delinquency rate was 15 percent in the second quarter of 2013, but it was 18 percent nationally.
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Figure 6Distribution of Borrowers and Delinquent Borrowerswith Student Loan Debt in the Second Quarter of 2013
quentborrowersbytheirtotalout-standingbalancesinthesecondquar-terof2013,roundedtothenearestthousanddollars.Theborrowers(inpurple)areheavilyskewedtowardthelowerbalances,withaquarterofallborrowershavingatotaloutstand-ingbalanceof$7,400orlessandhalfwithabalanceof$16,900orless.Thedistributionofdelinquentborrowers(ingreen)isevenmoreskewedtotheleft,andthelineisabovetheborrow-ers’lineforbalancesunder$13,000,indicatingthatborrowerswithtotalbalancesinthatrangeaccountforadisproportionatenumberofdelin-quencies.Thatresultisincontrasttoborrowerswhosebalancesfallbetween$13,000and$52,000,wheretheborrowers’(purple)lineisabovethedelinquentborrowers’(green)line,indicatingalowerdelinquencyrateforthisgroup.Forbalancesabove$52,000,theproportionsofbor-rowersanddelinquenciesaresimilarandverysmall,althoughtheshareofoverallborrowersgenerallyexceedstheshareofdelinquentborrowers,whichagainindicatesaslightlyde-presseddelinquencyraterelativetothosewithbalancesunder$13,000.
Tobeclear,theinterpretationofFigure6isnotthatcertaintotalbal-ancesfosterbetterloanperformancethanothers.Rather,borrowerswhoendupwithabalanceinagivenrangetendtoperformbetterwithrepayment.Thereareseveralpos-sibleexplanationsforthisoutcome.Onepossibilityisthatborrowerswithalowbalancediscontinuedtheireducationwithoutreceivingaqualification,whilethosewithhigherbalancescompletedtheircourseofstudyandobtainedadegree.Receiv-ingaqualificationisimportantforloanrepaymentbecauseearningsaremarkedlyhigherforthosewhocompleteacourseofstudy.19Alterna-tively,betterstudentsmaybeselect-ingbetter,moreexpensiveschools
Figure 7Proportion of Borrowers in the CCP withStudent Loan Debt, by Age
ThefigureexcludesloanswithECOAcodesofC(comaker),S(shared,unknown),T(terminated),andU(undesignated).SeeAppendix2formoreinformation.
Thecumulativedistributioncurves,inthelightershades,showtheproportionofborrowersanddelinquentborrowersatorbeloweachbalancelevel;quartilebalancesaremarkedoffforreference.
Delinquentborrowersaredefinedasborrowerswithatleastonestudentloanthatis90ormoredayspastdue,incollections,orchargedoff.
19AnthonyP.Carnevale,StephenJ.Rose,andBanCheah,“TheCollegePayoff,”GeorgetownUniversity,CenteronEducationandtheWorkforce,2013.
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6%
Cumulative % of Borrowers% of Borrowers
Balance (000s)
All Borrowers: Cumulative
Delinquent Borrowers: Cumulative
Delinquent Borrowers
All Borrowers
$0 $20$10 $30 $50 $70 $90$40 $60 $80 $100
‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13
0%
10%
20%
30%
40%
50%
60%
Source:FederalReserveBankofNewYorkConsumerCreditPanel/Equifax
Source:FederalReserveBankofNewYorkConsumerCreditPanel/Equifax
18–2930–3940–4950–5960+
9
Figure 8Median Student Loan Balance (nominal dollars), by Age
Figure 9Proportion of Borrowers with Student Loan Debt Who Have at Least One Cosigned Loan, by Age
ThefigureexcludesloanswithECOAcodesofC(comaker),S(shared,unknown),T(terminated),andU(undesignated).SeeAppendix2formoreinformation.
thatrequiregreaterdebtbutleadtoahigherpayoffinthelabormarketthereafter.Studentswithhigherexpectationsoffutureearningsmaybewillingtoborrowmoretodaythanthosewithoutsuchexpectations.
Mature Borrowers
Althoughthetraditionalstudentwillbeginhighereducationverysoonaftercompletinghighschool,manyborrowerscarrystudentloanswellpastthatperiodoftheirlife.Figure7documentsanincreasingprevalenceofstudentloansacrossallagegroups.Notsurprisingly,mostofthegrowthisamongborrowersunderage40,buttheproportionofborrowersintheCCPwithastudentloanalmostdoubledamongthoseintheir40sand50sandincreasedbyalmosttwoandahalftimesforthoseaged60orolder,albeitfromverylowlevels.Moreover,notonlyisthereanincreasingnumberofolderborrowersbut,liketheiryoungercounterparts,theyarealsotakingonlargerloans(Figure8).Themedianbalanceforaborrowerbetweentheagesof18and29was$17,700inthesecondquarterof2013,butborrowersintheir50swerenotfarbehindat$16,300,andevenborrowersintheir60shadamedianstudentloandebtof$14,500.Theyoungeragegroupsborrowatamuchhigherrate,butamongthosewhodoborrow,thesimilarityofthedebtlevelsacrosstheagegroupsisstriking.
Olderborrowersmaybetakingoutloansinordertopayfortheirowneducationorsomeoneelse’s—forexample,ayoungerfamilymember’s.Informationonwhatastudentloanisusedforisnotreportedtothecreditbureaus,butintheeventthattheloanistakenoutforsomeoneelse,itmaybeacosignedloan,meaningthatthestudentandthecosignerarejointlyresponsibleforrepayment.Theuseofcosignedloansrosealongwiththemarketasawhole,particularly
amongyoungborrowerswholackthecredithistoryneededtoobtainindividualloans(Figure9).Theshareofolderborrowerswithcosignedloansincreasedthroughthestudy
periodandisparticularlyhighrela-tivetoyoungerborrowers:Amongallholdersofstudentloansage60andolder,39percentheldcosignedloansinthesecondquarterof2013,com-
‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13
$0
(Thousands)
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Source:FederalReserveBankofNewYorkConsumerCreditPanel/Equifax
Source:FederalReserveBankofNewYorkConsumerCreditPanel/Equifax
18–2930–3940–4950–5960+
18–2930–3940–4950–5960+
10
paredwith11percentforborrowersintheir30s.Notethatthisstatisticisbasedonlyonloansforwhichcosignershavejointresponsibilityforrepayment;notincludedareso-calledcomakerloans,forwhichthecosign-ingpartyassumesresponsibilityforrepaymentonlyintheeventthattheprimaryborrowerisunabletomakepayments.
Inadditiontocosigningforaloan,olderborrowerscanalsoprovidefi-nancialsupportforayoungerfamilymember’seducationbysecuringanindividualloan.TheFederalParentPLUSloanprogram,forexample,isspecificallydesignedtoallowpar-entstomeetthecostoftheirchild’sundergraduateeducationinthisway.Forthoseborrowerswhodotakeonloanstopayforanotherperson’seducation,however,payingoffthoseloansmaybemoreburdensomethannormalbecausetheywillnotreceive
theincreasedearningpoweroftenassociatedwithadvancingone’seducation.Thiscouldbeparticularlychallengingforborrowerswhoarenearingtheendoftheircareersorwhohavealreadyretired.
Conclusions
Between2005and2013,thenumberofborrowersintheThirdFederalReserveDistrictwhotookoutloanstofinancetheireducationincreasedsubstantially,andthoseborrowerstookonincreasinglylargerdebts.Debtlevelsduringthisperiodwerepositivelycorrelatedwithneighborhoodincome,anddelinquencyrateswerehigherinlow-andmoderate-incomeneighborhoodsandforborrowerswithlowerbalances.Finally,despiteoftenbeingassociatedwiththeyoung,studentborrowingincreasedacrossallagegroups,intermsofboththenumber
ofborrowersandtheirbalances.
ThisanalysisprovidesanoverviewofthestudentloanmarketintheThirdFederalReserveDistrict,butimportantquestionsremainabouttheimpactofthedynamicsidentifiedhere.Forexample,abetterunderstandingofwhatrolecollegedurationandcompletionplayinloanperformancewouldbehelpfulinunderstandingwhydelinquentstudentloanborrowerstendtohaverelativelylowbalances.Additionalresearchonhowstudentdebtimpactslateraccesstoanduseofotherformsofcreditwouldhelpusunderstandtheimplicationsoftherecentsurgeinstudentborrowingandhowitmightaffectindividualborrowersandtheeconomyinthemediumtolongterm.Suchfutureresearchisnecessarytomorefullyunderstandthefindingsinthisreport.
Thomas Hylands isacommunitydevelopmentresearchassociateintheCommunityDevelopmentStudiesandEducationDepartmentatthePhiladelphiaFed.
11
APPENDIX 1: Introduction to Student Loans
ThefederalgovernmentisbyfarthelargestproviderofstudentloansintheU.S.andhasplayedaninstrumentalroleinshapingthemarket.Thefederalgovernmentrunsavarietyofloanprogramswithvaryingeligibilityrequirements(seeTableA1forasummary),butbecausebroadaccesstoeducationhasbeenalong-termpolicyobjective,studentloanshavebeenwidelyavailablewithlittleunderwritinginvolvedtoestablishtheborrower’sabilitytorepaythedebt.Evenprivatelenders,whowouldordinarilyhavemorereasontoensurethattheirdebtorsareabletorepaytheirloans,weregivenanincentivetolendtostudentsthroughtheFederalFamilyEducationLoanProgram(FFELP),whichprovidedsubsidiesandafederalguaranteeonprivatelyissuedstudentloans.
TheFFELP,alongwithprivateloansthatheldnogovernmentguarantee,helpedtocreatesignificantgrowthintheprivateloanmarket.Combined,
theyrepresented25percentofallstudentloanoriginationsbyvolumeinthe2007–08academicyear.aHowever,thatchangedinthewakeofthefinancialcrisisthathittheeconomythatyear.BecauseinterestratesonFFELPloanswerecapped,thereturnwastoolowtoattractprivatecapitalinatightcreditmarket,andmanyprivatelendersexitedthemarket.bIn2010,thefederalgovernmentdiscontinuedtheFFELPandswitchedtoanentirelydirectlendingmodel,theFederalDirectLoanProgram(FDLP).Inthe2012–13academicyear,thefederalgovernmentaccountedforroughly92percentofthestudentloandebtissued.c
Studentloansareextremelydifficulttodischargethroughbankruptcyproceedings:Onlywhenastudentcanprovethataloaniscausingunduehardshipcanaloanbedischarged,andthebarforprovingsuchaclaimisveryhigh.Moreover,theeducationthatispurchased
withstudentloanscannotbeusedascollateralforaloan,asinthecaseofahouseoracar,soborrowerswhofindthemselvesunabletorepaytheirstudentloansfaceaverydifficultsituation.Inresponsetoanincreasingnumberofstudentborrowersstrugglingtomakepaymentsontheirloans,thefederalgovernmenthasexpandedandintroducednewrepaymentplansformanyborrowersandloantypesthatallowgraduatedpayments,income-relatedpayments,extendedrepaymentperiods(fromthestandard10yearsuptoasmanyas25years),loanconsolidation,andloanforgivenessforworkingindesignatedfieldsforasetperiodoftime.Theseoptionsarenotavailableforprivatestudentloans,however,andsoborrowerswhoholdprivateloans,whichtendtohavehigherinterestratesandlessflexiblerepaymentoptionstobeginwith,havereceivedlittleornobenefitfromthefederalgovernment’sreforms.
aCollegeBoard,“TrendsinStudentAid2013,”CollegeBoard,2013.
bKellyEdmiston,LaraBrooks,andStevenShepelwich,“StudentLoans:OverviewandIssues,”FederalReserveBankofKansasCity,CommunityAffairsDepartmentWorkingPaper,2012.
cCollegeBoard,“TrendsinStudentAid2013,”CollegeBoard,2013.
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Table A1Types of Student Loans
Federal Direct ― Subsidized
Federal Direct ― Unsubsidized
Federal Parent PLUS/Grad PLUS Federal Perkins Private
Purpose: Forstudentswithdemonstratedfinancialneed;federalgovernmentpaystheinterestthataccruesontheloanwhilethestudentisinschool
Forallstudents,regardlessoffinancialneed;studentisresponsibleforinterestaccruedwhileinschool
Tomeetexpensesnotcoveredbyotherfederalaid
Low-interestloansforstudentswithexceptionalfinancialneed
Varies
Volume ($bn), 2012-13:
$28 $55 $17 $1 $9
Interest Rate (for loans issued 7/2013 to 6/2014):
3.86% UG:3.86%G/P:5.41%
6.41% 5.00% Varies
Annual Limit:* $3,500-$5,500,dependingonyearofcollege
$5,500-$7,500,dependingonyearofcollege**
Uptothecostofeducationminusotheraid
UG:$5,500G/P:$8,000
Varies
Aggregate Limit:*
$23,000 $31,000** N/A UG:$27,500G/P:$60,000***
Varies
Notes:TheFederalDirect(bothsubsidizedandunsubsidized)andPLUS(bothparentandgraduate)loanswereofferedthroughtheFFELPbeforetheprogramwasterminatedin2010.ThoseloansarenowofferedthroughtheFDLPinstead.
UG:undergraduatestudents;G/P:graduate/professionalstudents***Limitsreportedfordependentstudents;therearehighercapsforindependentstudentsandundergraduateswhoseparentsareunabletoobtain***FederalParentPLUSloans.***FederalDirect―UnsubsidizedlimitsarefortotalofsubsidizedandunsubsidizedFederalDirectloans.***IncludesFederalPerkinsloansaccruedasanundergraduate.
Sources:U.S.DepartmentofEducation,“SubsidizedandUnsubsidizedLoans,”2013,availableatstudentaid.ed.gov/types/loans/subsidized-unsubsidized(accessedNovember6,2013).U.S.DepartmentofEducation,“PLUSLoans,”2013,availableatstudentaid.ed.gov/types/loans/plus(accessedNovember6,2013).U.S.DepartmentofEducation,“PerkinsLoans,”2013,availableatstudentaid.ed.gov/types/loans/perkins(accessedNovember6,2013).CollegeBoard,“TrendsinStudentAid2013,”2013,availableathttp://ow.ly/th98R(accessedMarch24,2014).
APPENDIX 1: Introduction to Student Loans (continued)
13
Asmentioned,thisstudyusesdatafromtheFederalReserveBankofNewYorkConsumerCreditPanel/Equifax(CCP)dataset.TheCCPisananonymous,nationallyrepresentativerandom5percentsampleoftheU.S.populationwithaSocialSecuritynumberandacredithistory.TheCCPisanunbalancedpanel,whichmeansthattherandomlyselectedpanelistsareaddedtothedatasetoncetheymeettheentrancecriteriaandaredroppedintheeventthattheydieornolongerhavesufficientinformationintheircreditfile.EntryintotheCCPislimitedtoindividualsthatEquifaxknowstohaveatleastoneofthefollowing:apublicrecord(e.g.,ajudgment)withinthepastsevenyears;abankruptcyfilingwithinthepast10years;anopencreditaccount;oraclosedaccountthatisstillbeingreported.Notethataclosedaccountcanbereportedforuptosevenyearsifitdidnotcloseingoodstanding.a
Basedontheseselectioncriteria,itisclearthattheCCPdoesnotincludealladults:Asnotedpreviously,around8percentofhouseholdsdonothaveamemberwithacreditreportandthereforecannotbeincludedinthedataset.bFurthermore,thereisanapparentdelayinreportingsomeloansforyoungborrowers(ages18to23)intheCCP,andthisanalysissuggeststhattheproportionofyoungborrowersomittedfromtheCCPhasincreasedsince2011.Thismeansthat,althoughtheloansdoeventuallymakeitintothedataset,asmallproportionofloansareomittedeachquarter.Becauserecentquartersappeartobe
disproportionatelyaffected,estimatesofaggregatestudentloandebtsince2011maybesomewhatconservativerelativetopriorestimates.
Therawdatahaveinformationoneachindividualloanaborrowerholds.However,sincemanyborrowershavemorethanoneloan,forthisanalysisloanrecordsareaggregatedtotheleveloftheborrower.Thisanalysisexcludesdeceasedborrowersandthosewhoappearinthedatasetfornomorethanoneyear,unlesstheyarepresentinthemostrecentquarter.Borrowerswithanonresidentialaddress(e.g.,apostofficebox)andthoseforwhichrelativeneighborhoodincomeisunknownareexcludedfromincomecategoryestimatesbutincludedintotalestimates.
Inadditiontotherestrictionsbasedonborrowercharacteristics,theanalysisalsoexcludesloanswithEqualCreditOpportunityAct(ECOA)codesofC(comaker),S(shared,butunknowntype),T(terminated),andU(undesignated),andloansthatarebeingpaidunderawageearnerplan.Forcomakerloans,thepanelistisresponsiblefortheloanonlyintheeventthatthemakeroftheloandefaults,andsotheestimatesincludethemakers(ECOAcodeM)butnotthecomakers.Thesharedandundesignatedcodesindicatethatthecreditbureaucanidentifytheloanasastudentloanbutdoesnothavesufficientinformationtocategorizeitfurther,whichmeanstheloanmaybeofatypethatshouldbeexcluded.Terminatedloansmay
stillbeexistingaccounts,buttheyarenolongerassociatedwiththepanelistandshouldnotbetreatedassuch.
Loanswithmorethanoneborrower,referredtoascosignedloansinthisreport,appearonthecreditreportofeachpartytotheloan.Inordertoavoiddoublecountingthoseloanswhencalculatingaggregatestudentloandebt,thevalueofallloanswithanECOAcodeofJ(jointaccount)arehalved,butformediancalculations,thefullvalueoftheloanisretained.LoanswithanECOAcodeofM(maker)arejointloans,butthecosigningparty,orcomaker,becomesresponsibleforrepaymentonlyintheeventthattheprimaryborrowercannotmaketherequiredpayments.Inthisstudy,makerloansareincluded,butcomakerloans(ECOAcodeofC)areexcluded.Becauseofthisexclusion,themakerandcomakerloansdonotdoublecountthesameloan,somakerloansarenothalvedinaggregatebalancecalculations.Finally,theanalysisexcludesthefewloanswithavalueinexcessof$1,000,000.
Itisworthemphasizingthatthisanalysisdoesnotexcludeborrowersbasedonageorenrollmentstatus.Ideally,theanalysisofstudentloandebtbyneighborhoodincomecategorywouldexcludecurrentstudentsbecausetheneighborhoodincomeofacurrentstudent’screditbureauaddressmaynotbeagoodproxyforthatstudent’ssocioeconomicstatus,financialresources,orfutureprospectsfordebtrepayment.Whileitis,
APPENDIX 2: Data and Methods
aMoreinformationontheCCPisavailableinDonghoonLeeandWilbertvanderKlaauw,“AnIntroductiontotheFRBNYConsumerCreditPanel,”FederalReserveBankofNewYorkStaff Report479,2010.
bMetaBrown,AndrewHaughwout,DonghoonLee,andWilbertvanderKlaauw,“DoWeKnowWhatWeOwe?AComparisonofBorrower-andLender-ReportedConsumerDebt,”FederalReserveBankofNewYorkStaff Report 523,2013.
14
APPENDIX 2: Data and Methods (continued)
unfortunately,notpossibletoidentifycurrentstudentsinthisdatasetwithanydegreeofcertainty,Ididdevelopalternativeneighborhoodincomeestimatesthatexcluded
borrowerswhodidnotappeartohavebegunrepayingtheirloans—aproxyforcurrentstudentsandrecentgraduates.Otherthanslightlyhighermedianbalancesforallofthe
neighborhoodincomecategories,thealternativeestimateswerenotqualitativelydifferentfromthosepresentedinthispaper.
Sources: ArcUSA, U.S. Census Bureau, ESRI
The Third Federal Reserve District
The Federal Reserve Bank of Philadelphia serves the Third District, which covers eastern and central Pennsylvania, southern New Jersey, and Delaware. The Bank’s Community Development Studies and Education Department supports the Federal Reserve System’s economic growth objectives by promoting community development in low- and moder-ate-income communities and fair and impartial access to credit in underserved markets.