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Student Loan Defaults Increase

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Household debt surpassed its 2008 recession peak in the first quarter of 2017, according to a recent report from the Federal Reserve Bank of New York.

At $12.73 trillion, household debt stood at $149 billion or 1.2 percent above the previous quarter.

Mortgage balances, which make up the largest amount of debt, rose 1.7 percent to $8.63 trillion as of March 31.

But outstanding student loans debt is growing at a faster pace – rising 2.6 percent in the first quarter to $1.34 trillion.

Student loan debt is the second largest component of household debt since exceeding the amount of credit card debt in the second quarter of 2010.

There is no question that with a growing number of people in college and rising tuition costs, more students are taking on loans and face years of paying down that debt — whether they successfully graduate or not.

In 2016, about 36 percent of student debt holders owed less than $10,000, according to the New York Fed, while 65 percent owed less than $25,000. Just 5 percent owed more than $100,000.

Eleven percent of student loans were delinquent by 90 days or more in the first quarter 2017 compared with a 3.4 percent delinquent rate for all household loans.

One leading explanation for the high student loan default rates has been the growth of “non-traditional” borrowers attending community colleges and for-profit institutions.

These borrowers, which tend to be older, and from less-wealthy families, complete programs at lower rates and have weaker labor market outcomes with jobs and earnings. All of those factors contribute to higher default rates.

Another potential explanation for part of the increase in student loan defaults relates to the drop in home prices during the Great Recession.

The falling values of home prices account for about 24 percent to 32 percent of the increase in student loan defaults, according to a recent working paper from the National Bureau of Economic Research.

When home prices collapsed in 2007, it triggered a drop in household consumer spending, which in turn led to large employment losses. The layoffs reduced the ability of individuals with student loans to make loan repayments, especially if they had lower earnings to begin with.

The study authors used individual-level student loan data linked to tax records and ZIP code level data on home price changes to estimate the effects. They found a strong relationship between home prices, employment losses and student loan defaults, especially among low wage jobs, which accounts for the increase in student loan defaults.

Even though a college degree often comes with student loans, an analysis by mortgage giant Fannie Mae of its National Housing Survey data concluded that the higher income associated with obtaining at least a bachelor’s degree outweighs the burden of student loans in terms of likelihood to own a home even though it may delay home ownership.

In contrast, those who started college, accumulated debt, and did not earn a degree are 32 percent less likely to own a home than high school graduates who have no student loans.

(This column first ran in the Richmond Times Dispatch on July 7, 2017)

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