New York Fed Says Student Loan Balances Are Increasing Among Down Market Borrowers

Credit cards and mortgages are spiking among bulge bracket consumers
By John Sandman ,

A study by the Federal Reserve Bank of New York that examines borrowing patterns since the end of the Great Recession finds that people in upper income brackets have been taking on more mortgage and credit card debt while those with lower incomes are borrowing less--with the exception of money borrowed to go to school. Aside from home mortgages, student loans are the biggest consumer debt category in the United States.

The New York Fed, which says the recovery began in 2013, initiated the study, because it found a dearth of research on recent borrowing patterns for these groups.

"We use zip code-level income data from the 2012 Internal Revenue Service Statistics of Income and population information from the 2010 Census to obtain an estimate of income per adult for each zip code," said Donghoon Lee, research officer in the Fed's Statistics Group and author of the report. Zip codes were divided into five groups, or quintiles, that contain a roughly equal population of individuals aged eighteen and over. The lowest quintile consists of zip codes where the average income per adult was $22,000 or less, while the highest quintile captures those with an income per adult greater than $48,000."

The New York Fed found that mortgage debt and credit card debt balances are larger among the higher-income group, which it said was a reflection of recovering home values.

In 2004, mortgage balances among the lowest-income group were 22% the size of mortgages in the highest-income group. By 2007, as mortgages were easier to get and the subprime lending market peaked, the ratio was 23%, a modest increase. However, since the boom and the contraction of the subprime housing market, the New York Fed found number has steadily decreased. Now mortgages in the lowest-income zip codes are only 18% the size of those in the highest.

The trend toward bigger concentrations of debt among low-income zip codes has extended to student loan, however, where it is more pronounced.

"Average student loan balances in the lowest quintile were 52% of those in the highest quintile in 2004, but rose to 59% in 2014," said Lee in the report. Until 2009, student loans had been the smallest category of household debt. During the Great Recession, Americans cut down on other types of borrowing but went all in on student loans, as many people who lost their jobs fled to higher ed and waited for things to change.

If the Great Recession made school cool for the unexpectedly unemployed who now join an improving—some would say tepid—labor market, they are carrying student loan balances that will cut into their incomes. And while the lower income groups may have bigger student loan balances than their upper income counterparts, the New York Fed found that students loans themselves have become more equally distributed across all groups.

The New York Fed found that auto loans increased in the low-income zip codes until 2008, when the Great Recession turned back the tide. The New York Fed attributed a recent recovery to the spike in subprime auto loans. Still, auto loans balances have not reached the levels of a decade ago.

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