Student Loans: Painting a Clear Picture University of Kansas April 22, 2014 Kelly D. Edmiston Senior Economist Federal Reserve Bank of Kansas City
Outline Outstanding Student Loan Debt Capacity to Repay / Burden Delinquency Fiscal Impact State Level Variation 2
Outstanding Student Loan Debt $1.2 $1.0 billions $1.1 $1.2 $1.0 $0.8 $0.8 $0.6 $0.6 $0.4 $0.4 $0.2 $0.2 $0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 $0.0 Source: Federal Reserve Bank of New York 3
Growth in Student Loan Lending $60 In Constant 2010 Billions of Dollars In Constant 2010 Billions of Dollars $60 $50 $50 $40 $40 $30 $30 $20 $20 $10 $10 $0 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 Unsubsidized Stafford Loans Subsidized Stafford Loans Nonfederal Loans Plus Source: The College Board, Trends in Student Aid $0 4
Outstanding Student Loan Debt Most of increase coming from increased number of borrowers increases in average debt is moderate Largely driven by enrollments Moderate increase in share who borrow 25.0 Some increase in average debt in recently, 20.0 but has started to come down (Equifax) 15.0 Likely a function of Economy and tuition/ assistance 10.0 #enrollees Enrollments #enrollees 25.0 20.0 15.0 10.0 What is the issue? Borrower capacity to repay / burden Fiscal burden 5.0 0.0 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: NCES. IPEDS 5 5.0 0.0
30,000 Nominal Dollars Trend in Debt / Borrower 25,000 20,000 15,000 10,000 5,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 6
Outstanding Student Loan Debt Most of increase coming from increased number of borrowers increases in average debt is moderate Largely driven by enrollments Moderate increase in share who borrow 25.0 Some increase in average debt in recently, 20.0 but has started to come down (Equifax) 15.0 Likely a function of Economy and tuition/ assistance 10.0 #enrollees Enrollments #enrollees 25.0 20.0 15.0 10.0 What is the issue? Borrower capacity to repay / burden Fiscal burden 5.0 0.0 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: NCES. IPEDS 7 5.0 0.0
Capacity to Repay / Burden Individual Student Loan Debt Statistics (Fourth Qtr, 2013) Median $14,050; Average $25,745 25% under $5,824 25% over $31,001 > 3% with debt over $100,000 0.5% over $200,000 Payments (in repayment): $197 median; < $97 for 25%; >$423 for 25% 40% of borrowers under 30 (1/3 over 40) Sources: Authors calculations using data from the Federal Reserve Bank of New York Consumer Credit Panel; Federal Reserve Bank of New York 8
Capacity to Repay / Burden Credit Profile of Student Loan Borrowers Profile of Student Loan Borrower Credit Conditions, First Quarter, 2012 Student Loan Borrowers First Third Credit Item Average Median Quartile Quartile Non-Student Loan Borrowers First Third Average Median Quartile Quartile Student Loan Debt $24,218 $13,662 $5,977 $29,155 n/a n/a n/a n/a Total Debt 82,994 24,576 6,608 106,027 $66,227 $3,522 $0 $68,440 Consumer Debt /*/ 31,883 17,999 5,500 41,097 13,084 1,379 0 13,850 Revolving Debt 6,888 644 0 4,470 7,703 283 0 3,349 Credit Score 626 696 /*/ Total debt less first mortgage. Source: Authors calculations using data from the Federal Reserve Bank of New York Consumer Credit Panel / Equifax 9
Student Loan Delinquency 20% 4-month moving average 20% 17.4% Payment > $0 16% 23% delinquency for those in repayment, determined by eliminating loans with zero or increasing balances that are not past due All 13.6% 16% 12% 12% 9.7% 8% 7.9% 8% 4% 0% 1.9% 1.2% 1.1% 0.7% 0.2% 0.5% Past Due 30-59 days 60-89 days 90-119 days 120+ days 4% 0% Sources: Authors calculations using data from the Federal Reserve Bank of New York Consumer Credit Panel 10
Cohort Default Rates 25% Share of cohort in default 22.4% 21.4% 25% 20% 20% 17.6% 17.2% 17.8% 15% 15.0% 15% 10% 11.6% 10.7% 10.4% 9.6% 8.8% 8.8% 9.1% 10.0% 10% 6.9% 6.7% 7.0% 5.6% 5.9% 5.4% 5.2% 4.5% 5.1% 4.6% 5.2% 5% 5% 0% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: U.S. Department of Education, Office of Federal Student Aid Latest release: September 28, 2012 0% 11
Delinquency Rate (All Loans) 18% Percentage 18% 16% 16% 14% 14% 12% 12% 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 2001 2003 2005 2007 2009 2011 2013 Source: Federal Reserve Bank of New York Consumer Credit Panel / Equifax 12 0%
Issues Driving Delinquency Recession and Recovery Most over-due balances for those over 30 Unemployment (real rate?), esp. for young Underemployment Slower wage and salary growth, esp. for young AP: 50% of young unemployed/underemployed Noncompletion Better prospects for completers (buying an asset; lifetime income) Especially high for for-profit (28% completion for-profit, 56% public, 65% private not-for-profit) No credit consideration Poor borrower information 13
Fiscal Impact Accrual-based budgeting NPV (incl disbursements, subsidies, payments) Federal Credit Reform Act (FCRA, 1990) method Federal Government Costs using FCRA FY2011: -$47.3b FY2012: -$34.3b (est.) FY 2013: -$32.2b (proposed) Updates vs. fair-value 14
Fiscal Impact Accrual-based budgeting (cont) Fair-value estimates CBO: 11 percent of disbursements Implies $13.3b (+$3b consolidation) Indirect Greater income tax revenues; lower costs Interest deductions Outlook Not expected to see much higher default rates Could see continued rapid increases in borrowing Reform options 15
State Variation in Student Loan Debt and Performance (Purpose) State-level analysis may shed light on understanding a consumer s decision to take out loans and his/her behavior repaying them An understanding of how state-level support for higher education influences student loan borrowing and performance may inform policymaking on effective student aid at the national level 16
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State Variation in Student Loan Debt and Performance (Debt) Rising cost of tuition and fees $22,826 public 4-year ($8,893 tuition) $44,750 private Family financial resources Significant link between family financial resources and decision to attend college 529, Coverdell (not fully utilized; insufficient for many families) Educational attainment better performance of students; likely higher financial resources Demographics: risk score and indebtedness; age; cultural background (willingness to borrow) 22
State Variation in Student Loan Debt and Performance (Debt) Health of the economy Laid off workers go back to school Graduating students find it difficult to secure a job Parents find it harder to save Interest on student loans Other forms of federal and state aid (scholarships and grants) 23
State Variation in Student Loan Debt and Performance (Performance) Most factors influencing debt accumulation College completion Single variable with greatest significance For-profit institutions 24
Contact Information: Kelly D. Edmiston Senior Economist Community Development 1 Memorial Drive Kansas City, MO 64198 (816) 881-2004 Kelly.edmiston@kc.frb.org 25