NEW YORK (MainStreet) — The New York Fed last week released research on the student loan market which found that aggregate loan balances has increased steadily, even during the credit deleveraging of the Great Recession, when the balances of other household debt types declined.
While student debt has historically been held by younger borrowers, the balances held by borrowers of all age groups have increased "The fastest growth has been in balances held by borrowers over age sixty," the Fed's report said, "which increased 850% between 2004 and 2014. In 2004, 25% of student debt was held by borrowers over age 40. That share went to 35% by 2014. This change occurred primarily as a result of increases in the number of borrowers over forty, which grew at nearly double the pace of younger borrowers.”
During the Great Recession, people from all walks of life fled the job market for higher ed, from career colleges to post-doctoral studies. Since they a return to the workforce has been noted.
"Although both the aggregate outstanding student loan balance and the number of individuals with outstanding student debt have been increasing steadily, we have recently seen a decrease in the number of active borrowers—borrowers originating new loans in each year," said the New York Fed report, which was written jointly by Andrew Haughwout, Donghoon Lee, Joelle Scally and Wilbert van der Klaauw. "The number of active student loan borrowers peaked in 2010, at about 12 million, and is now down to about 9 million. This divergence in increasing aggregate balances and decreasing numbers of active borrowers stems from the low repayment rates."
The New York Fed tracked borrowers by zip code at the time their first loans, and used the average income in that zip code to categorize the borrowers into income groups. "We find that while there was an inflow of borrowers of all economic backgrounds during the Great Recession, the sharpest growth was for borrowers from the lowest-income areas," the report said.
One piece of good news is that fewer borrowers have loans that go into default. That could change over the life of the loan, depending on the borrower, loan balances and other factors.
”Looking at borrowers who transition into default each year, we find that there was a period of sharp increases—from about half a million borrowers ten years ago to 1.2 million annually in 2011 and 2012," the report continued. In the last two years there's seen a small decline in the number of borrowers who transition into default. Accounting for the increase in borrowers, the Fed found that the rate of default increased from 2.4% in 2004 to 3.6% in 2012, before diminishing to 3.1% in 2014.
”Our February 19 post, 'Looking at Student Loan Defaults through a Larger Window', categorizes borrowers by their school-leaving cohort and concludes that the three-year window typically used to look at cumulative defaults by cohort is likely too short to capture the bulk of students who will eventually default," the Fed wrote. "Further, we find that the cohort default rate schedules are worsening over time.”
The Fed looked at the net share of balance that borrowers from each Zip-code-based income grouping have made in paying of their loans and pronounced the results "striking." The 2009 cohort borrowers from the lowest-income areas have made practically no progress in paying down their loans.
"The aggregate balance, five years after leaving school, is still at 97% of what it was when they left school,” the Fed said. “This is in sharp contrast with the borrowers from wealthier zip codes, who have made significant progress on reducing their balances."
But even borrowers from the wealthiest zip codes have not made huge progresses. The Fed found that these borrowers had paid down less than 30% of their balances.
--Written by John Sandman for MainStreet