Fed Student-Loan Focus Shows Recognition of Growth Risk
Tiffany Roberson works for the state of Texas as a parole officer, teaches part time and is living with her parents after finishing a master’s degree. She’s held off marrying her boyfriend of four years and starting a family because she owes more than $170,000 in federal and private student loans.
“I’ve never gone into default,” the 30-year-old said. “What really hurts is people say I’m a bum for living at home.”
Federal Reserve economists are trying to determine whether people like Roberson represent a trend that will damage U.S. growth, partly by restricting sales of houses and cars. Student loans are one of the only deteriorating pockets of consumer credit, with balances and delinquency rates rising to record highs even as a strengthening economy allows Americans to reduce total borrowing.
Outstanding education debt exceeded $1 trillion in the third quarter of 2013, and the share of loans delinquent 90 days or more rose to 11.8 percent, according to the Federal Reserve Bank of New York. By contrast, delinquencies for mortgage, credit-card and auto debt all have declined from their peaks.
“I’m always made very nervous by a credit market that benefits from government guarantees and is expanding very rapidly,” Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said in response to audience questions after a speech at a Jan. 10 Greater Raleigh Chamber of Commerce event in North Carolina. “That’s what we’re seeing with student loans, and it’s what we saw with housing.”
Economists at the New York Fed are analyzing student debt as part of their quarterly reports on national household credit. That project emerged six years ago as the credit crisis unfolded, when the researchers and their then-boss, Timothy F. Geithner, realized there wasn’t a good way to study total consumer borrowing.
They began assembling their own figures, relying on credit reports from Atlanta-based credit bureau Equifax Inc. (EFX) -- and found that information on student borrowing was particularly sparse because of gaps in the frequency and type of publicly available data.
The Department of Education releases defaults rates on federal loans once a year and only for borrowers who haven’t made required payments for at least 270 consecutive days during the two- and three-year periods after they graduate or drop out. The rates don’t include students with extensions -- such as deferrals and forbearance, or federal income-based repayment programs -- which can indicate signs of borrower distress. They also don’t include private loans, which account for about 15 percent of the market.
“We didn’t realize there was so little data,” said Wilbert van der Klaauw, one of the New York Fed economists involved in the analysis.
Studying the growth of education debt as part of total consumer borrowing is important because it may limit access to credit for financing homes or autos, van der Klaauw and economists Donghoon Lee and Andrew Haughwout said in a Jan. 9 interview at the district bank. They and their colleagues also are trying to understand how the rising burden influences living arrangements -- such as college graduates like Roberson who stay with their parents because they can’t afford to move out. That, in turn, may reduce marriage and birth rates.
The New York Fed has played an important role in analyzing the potential problem by focusing on outstanding student loans, delinquencies and how this borrowing fits into the larger consumer-debt picture, said Lauren Asher, president of the Institute for College Access & Success, a nonprofit group based in Oakland, California.
There’s “no question” we need to know more “than the current data tells us,” she said.
Students are borrowing more to fund college and graduate school as the cost of higher education rises faster than the rate of inflation. The price tag at some of the most expensive private colleges is now more than $60,000 annually. Average tuition and fees at private schools in the 2013-2014 academic year was $30,094, up from $18,060 in 2002-2003, according to the College Board, a New York-based nonprofit representing more than 6,000 educational institutions.
The share of 25-year-old Americans with student debt increased to 43 percent in 2012 from 25 percent in 2003, and the average loan balance rose 91 percent, to $20,326 from $10,649, New York Fed data show.
While the district bank’s calculations don’t distinguish between private and federal loan debt, they are more real-time than those of the Education Department: They reflect balances on a 5 percent sample of people with a Social Security number and a credit report. The Education Department’s default rate covers only dropouts and graduates two and three years after finishing a program.
The department began publishing data on its website in July 2013 about the current status of outstanding federal student loans, such as forbearance and deferment, to provide more information in a user-friendly format, a spokesman said.
There remain a lot of “missing pieces,” including the link between debt levels and specific universities or courses of study, van der Klaauw said.
“If you’re a pre-med student, you’re an engineering student, and you take out $40,000 or $60,000 of loans, I have no problem with that,” John Silvia, chief economist at Wells Fargo & Co., said in response to audience questions after a speech at the Jan. 10 Raleigh, North Carolina, event. “But if you’re going to be a French major, you’re going to study social welfare, and you’re going to take out $60,000 of loans, who is making the economic judgment there?”
U.S. borrowers, including students and their parents, owe $1.2 trillion in educational-loan debt, according to the Consumer Financial Protection Bureau, or CFPB -- surpassing all other kinds of consumer borrowing except for mortgages. About $1 trillion is government loans and the rest is an estimate of private loans based on data submitted for a 2012 report.
There’s a discrepancy between the CFPB’s number and the New York Fed’s: The district bank calculates the total at $1.03 trillion.
“We do hear from borrowers that they sometimes find missing or inaccurate information in their credit reports when it comes to student loans,” said Rohit Chopra, the CFPB’s student-loan ombudsman, who published a blog post in August that analyzed federal debt. “This does raise questions” about the accuracy of information servicers give reporting agencies.
While undergraduates are limited in how much they can finance through federal programs, parents and graduate students can borrow much more. They can take out federal PLUS loans up to the cost of attendance -- including tuition, room, board, transportation and personal expenses -- minus any aid received.
A student-loan crisis would “force parents and students to think about” their expected return on education, Silvia said. “Like in housing, we learn by going through that craziness, and now hopefully the next generation won’t make that same mistake.”
Borrowers already have a harder time with repayments. About one in seven, or 14.7 percent, of students defaulted on federal loans in the first three years they are required to make payments, according to Education Department data released in September. The rate was was 13.4 percent a year earlier.
While the New York Fed and CFPB data “have their limitations,” they are “helping to flesh out the clearer picture and key dynamics,” said the Oakland nonprofit’s Asher.
“Compared to other financial products, performance data on student loans is much more opaque,” Chopra said. Given that the market has grown so rapidly, “financial regulators must significantly increase the level of monitoring.”
“Our job is to really understand what’s happening in the financial system,” and the “very rapid rise in student-loan debt over the last few years” can “actually have some pretty significant consequences to the economic outlook,” New York Fed President William C. Dudley said at a Nov. 20 briefing with reporters at the district bank.
“People can have trouble with the student-loan debt burden -- unable to buy cars, unable to buy homes -- and so it can really delay the cycle.”
Tiffany Roberson now is looking for a third job, partly because rising interest rates have increased her debt to about $72,000 in federal loans and $102,000 in private loans. She pays almost $1,000 a month on the latter and about $33 on the federal loan through a program based on her income.
“These payments eat up my paycheck,” she said. “It puts a huge drain on living the American dream.”