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MARCH 05, 2012 Follow Liberty Street Economics

Meta Brown, Andrew

Grading Student Loans Haughwout,
Donghoon Lee,
Maricar Mabutas,*
and Wilbert van der Klaauw
Student loans support the education of millions of students
nationwide, yet much is unknown about the student loan
market. Relevant data are limited and, for the most part,
anecdotal. Also, sources tend to focus on recent college
graduates and do not reveal much information about the
indebtedness of parents, graduate students, and those who
drop out of school.
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About the Blog
Liberty Street Economics features insight and analysis
from New York Fed economists working at the
intersection of research and policy. Launched in 2011,
the blog takes its name from the Bank’s headquarters
at 33 Liberty Street in Manhattan’s Financial District.

To inform the public and policymakers, we devote this The editors are Michael Fleming, Andrew Haughwout,
post to some new findings obtained from the FRBNY Thomas Klitgaard, and Asani Sarkar, all economists in
Consumer Credit Panel, a unique and nationally the Bank’s Research Group.
representative data set sourced from Equifax credit reports.
The FRBNY Consumer Credit Panel has made possible our
Quarterly Report on Household Debt and Credit, first The views expressed are those of the authors, and do
issued in the second quarter of 2010. We will examine the not necessarily reXect the position of the New York
overall student loan debt market as of third-quarter 2011, Fed or the Federal Reserve System.
giving particular attention to changes from the second to
the third quarter and highlighting new findings by age
Economic Research Tracker
group as well.
Liberty Street Economics is now
The outstanding student loan balance now stands at available on the iPhone® and
about $870 billion,1 surpassing the total credit card balance
iPad® and can be customized by
($693 billion) and the total auto loan balance ($730 billion).
economic research topic or
With college enrollments increasing and the costs of
attendance rising, this balance is expected to continue its economist.
upward trend. Further, unlike other types of household debt
such as credit cards and auto loans, the student loan market
is incredibly complex. Numerous players and institutions
hold stakes at each level of the market, including federal View by Topic
and state governments, colleges and universities, financial
BANK CAPITAL BALANCE OF PAYMENTS BANKS
institutions, students and their families, and numerous
CENTRAL BANK CORPORATE FINANCE CREDIT CRISIS
servicers and guarantee facilitators.
CRISIS CHRONICLES CRYPTOCURRENCIES

Student loans have received considerable media attention
in recent months as researchers and policymakers voice
growing concern about the heavy debt loads assumed by
students and their parents. In addition to worries about the
volume of outstanding student debt, there is concern about
having enough federal aid to support the large number of
students taking up postsecondary education. Federal and
state governments are deeply involved in the student loan
market, either directly originating student loans or
CURRENT ACCOUNT DEALERS DEMOGRAPHICS
DODD-FRANK DSGE ECONOMIC HISTORY EDUCATION
EMPLOYMENT EURO AREA EXCHANGE RATES
EXPECTATIONS EXPORTS FED FUNDS FEDERAL RESERVE
FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIATION
FINANCIAL MARKETS FIRE SALE FISCAL POLICY FOMC
FORECASTING FORECLOSURE GREAT RECESSION
HEY, ECONOMIST! HIGH FREQUENCY TRADING
indirectly guaranteeing them. The Health Care and
Education Reconciliation Act, signed into law last year,
ended private lending of federally subsidized loans,
approved expansion of Pell Grants, and appropriated funds
to invest in institutions that serve minority and low-income
populations. Still, advocates for students clamor for more to
be done to increase the availability of student loans.
Further, state budget cutbacks to higher education amid
tight fiscal circumstances may result in higher tuition.
In October 2011, President Obama announced executive
actions to cap monthly federal student loan repayment at 10
percent of discretionary income for college graduates, eased
from the previous 15 percent. This cap comes as some relief
to those who worry about how they will pay back their debt.
Moreover, student loan debts are typically shouldered by
recent college graduates and other young workers, who tend
to face lower incomes and higher rates of unemployment
than older cohorts.
From the second to the third quarter of 2011, the total
outstanding student loan balance grew 2.1 percent, from
$852 billion to $870 billion. Over the same time period,
other types of consumer debt declined or remained flat. Of
the 241 million people in the United States who have a
credit report with Equifax, our data provider, about
15.4 percent—or 37 million—hold outstanding student loan
debt. The student loan debt, however, is not evenly
distributed across the general population. Among people
under thirty years old, 40.1 percent have outstanding
student loan debt. Among people between the ages of thirty
and thirty-nine, 25.1 percent have outstanding student loan
debt. In contrast, only 7.4 percent of people who are at least
forty years old have outstanding student loan debt. As a
result, $580 billion of the total $870 billion in student loan
debt is owed by people younger than forty (see charts
below).
HISTORICAL ECHOES HOUSEHOLD HOUSEHOLD FINANCE
HOUSING HUMAN CAPITAL INEQUALITY INFLATION
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NEW JERSEY NEW YORK NEW YORK CITY PANIC
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REGIONAL ANALYSIS REGULATION REPO SANDY
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 The average outstanding student loan balance per
borrower is $23,300. Again, there is substantial
heterogeneity in balances of individual borrowers. The
median balance of $12,800 is roughly half the average level,
which indicates that a small fraction of people have balances
significantly higher than the median. About one-quarter of
borrowers owe more than $28,000; about 10 percent of
borrowers owe more than $54,000. The proportion of
borrowers who owe more than $100,000 is 3.1 percent, and
0.45 percent of borrowers, or 167,000 people, owe more
than $200,000. The distribution also varies by age group:
for example, borrowers between the ages of thirty and
thirty-nine have the highest average outstanding student
loan balance, at $28,500, followed by borrowers between
the ages of forty and forty-nine, whose average outstanding
balance is $26,000 (see chart below).

How much difficulty are borrowers having paying back

their debts? Of the 37 million borrowers who have
outstanding student loan balances as of third-quarter 2011,
14.4 percent, or about 5.4 million borrowers, have at least
one past due student loan account. Together, these past due
balances sum to $85 billion, or roughly 10 percent of the
total outstanding student loan balance. To put this in
perspective, the same 10 percent rate applies on average to
other types of household delinquent debt, including
mortgages, credit cards, and auto loans. Does this mean that
the prospects for student loan delinquencies are similar to
those for the household debt in general, and thus no special
attention is warranted? (See chart below.)

Unfortunately, this is not the case—some special

accounting used for student loans, not applicable to other
types of consumer debt, makes it likely that the delinquency
rates for student loans are understated. In the case of
federally backed loans, which represent a majority of total
lending, repayment is deferred until the student graduates
from school and can then be pushed back by another six-
month grace period. How do these student loans in
deferment or grace periods show up on credit reports and
contribute to the delinquency statistics? Given that no
payment is necessary until graduation, these deferred
student loans are not included in the past due balance but
they are included in the total balance from which the
delinquency rate is derived. This may help explain the low
proportion (12.6 percent) of borrowers with past due
student loans among those under thirty years old, compared
with 16.9 percent among those between the ages of thirty
and thirty-nine, since many of the younger borrowers are
still in school and don’t yet have to make any payments.

To address this potential bias in calculating delinquency

statistics, we exclude individuals who appear to be
temporarily exempt from making payments because they
are in school or newly graduated from school. These are
students who, as of third-quarter 2011, owed as much as or
more than they did in the previous quarter while
maintaining a zero past due balance. We will be able to
make our inference more precise when loan-level panel data
are available, but this is our first-cut analysis given the
available data. We warn that there is room for
misclassification in this analysis. For example, there could
be borrowers who are subject to the income-based
repayment plan whose payment fell short of the accrued
interest, resulting in a balance that increased. Recall that
this exercise looks at the student loan borrowers who have a
balance as of third-quarter 2011; therefore, those who had
taken out a loan at one point but paid it off before third-
quarter 2011 are not accounted for.

From this exercise, we find that as many as 47 percent of

student loan borrowers appear to be in deferral or
forbearance periods, and thus did not have to make
payments as of third-quarter 2011. Specifically, 17.6 percent
of borrowers had exactly the same balance in the third
quarter as in the second quarter of this year, and
29.1 percent increased their overall student loan balance by
taking on new originations or accruing interest to the
balance.

We then recalculate the proportion of borrowers with a

past due balance excluding this group of borrowers. We find
that 27 percent of the borrowers have past due balances,
while the adjusted proportion of outstanding student loan
balances that is delinquent is 21 percent—much higher than
the unadjusted rates of 14.4 percent and 10 percent,
respectively (see charts below).

In sum, student loan debt is not just a concern for the

young. Parents and the federal government shoulder a
substantial part of the postsecondary education bill.
Moreover, the student loan delinquency picture is not fully
captured in the broad statistics since a significant
proportion of borrowers and balances are not yet in the
repayment cycle. The implications of this last fact for future
changes in the student loan delinquency rate are a very
important area of research.

Given that student loans are an indispensable tool for

educational advancement, this form of debt will remain a
critical policy focus for generations to come. Going forward,
we will continue to monitor the student loan market with
new data each quarter, and we will try to provide useful
information on the landscape of student debt.

1The marginal difference between this figure and the

student loan balance found in the Quarterly Report on
Household Debt and Credit can be attributed to the
difference in the size of the sample used to calculate the two
unique figures.

*Maricar Mabutas is an assistant economist in the Research

and Statistics Group.

Disclaimer
The views expressed in this post are those of the authors
and do not necessarily reflect the position of the Federal
Reserve Bank of New York or the Federal Reserve System.
Any errors or omissions are the responsibility of the
authors.

Posted by Blog Author at 07:00:00 AM in Household Finance, Student Loans

COMMENTS

You can follow this conversation by subscribing to the comment feed for
this post.

Thanks again to our readers for the thoughtful comments. We are gratified
by the response to our post, and agree with Steve Rhode that educational
debt is not just a concern for the young. To be clear, we don’t take a strong
view on whether student loans are a good or a bad thing, but with an
aggregate outstanding balance of around $870 billion, educational debt is
undeniably important. We hope that our new data set will continue to
shed some light on this important part of consumers’ balance sheets,
especially since it is difficult to get comprehensive data from other public
sources, as Roberto Allende and Craig commented.

We also received a few technical questions/comments, from Niezenger

and Mossup. They ask if we can get a breakout of Income Based
Repayment. We don’t have a direct measure of those, but if the payments
are insufficient to cover all the interest due, then the balance will be
increasing and we would count those as loans that are not in repayment.
Mossup makes some other definitional comments as well. We count loans
as delinquent only after they are at least thirty days past due. We exclude
defaulted loans that have been charged off of the credit report. We exclude
borrowers whom we estimate are in the deferment or grace periods from
both the numerator and the denominator of our alternative delinquency
calculation.

Posted by: Blog Author | March 20, 2012 at 05:14 PM

If you desire to examine evidence on default rates by sector of higher

education (public, private not-for-profit and private for-profit), see:

http://www.decisionsonevidence.com/2011/08/federal-financial-aid-
default-rates/

Posted by: Michael C. Morrison | March 10, 2012 at 05:29 PM

It is a really very important tool for all students. I hope it help us. thanks!

Posted by: Muhammad Jahid Hasan | March 09, 2012 at 01:45 PM

They forget to mention with people in their 30's and 40's if they are
holding high student loan debt levels they aren't able to "feed the
machine" buying stock, purchasing things to boost the economy etc. It is a
huge draw down of the economy and those same people won't be able to
save for their future either and will drag it down as well towards the end of
their lives if things don't change.

Posted by: Casey Williams | March 08, 2012 at 09:50 AM

The significant burden of debt that has been created by student loans, and
more specifically the inflexibility of private student loan lenders is a crisis
in the making. I've been covering this growing tragedy for some time now.

The worst cases I've seen are those where a loving grandparent co-signed
for a government backed student loan and wound up having their minimal
social security benefits garnished.

If it is appropriate to include this link I started a recent petition to Pass

the Fairness for Struggling Students Act of 2011. See
https://www.change.org/petitions/the-us-senate-pass-the-fairness-for-
struggling-students-act-of-2011

Posted by: Steve Rhode | March 07, 2012 at 12:20 PM

If graduates are unable to repay their loans because their employment is

artificially shortened by current employer hiring practices that make a
mockery of the Age Discrimination Act of 1967, as Amended, criticism of
that employer conduct should be allowed on this public website.
Furthermore, links to two articles on the student debt crisis are also
relevant. Instead, my post, which is available on Facebook, has been
deleted.

Posted by: Dr. Gene Nelson | March 07, 2012 at 08:34 AM

It is my understanding that only half of the colleges answered the survey

concerning the average student loan debt. It seems logical to assume that
many universities - particularly private universities - did not report their
student loan debt because they wanted to conceal how much debt their
students hold. And some of those colleges that did report may have fudged
the numbers because they were under no obligation to be precise.

The $25,000 figure cited by colleges and news media is not an absolutely
trustworthy number. I would not be surprised if the average student loan
debt for a public education is closer to $35,000 and that the average
student loan debt for a private education is at least $55,000.

The Project on Student Debt noted that because the data is voluntarily
reported by colleges, actual debt is probably higher than its report shows.
~ CNN Money. Average student loan debt tops $25,000 By Blake Ellis
November 3, 2011: 5:22 AM ET

Posted by: Roberto Allende | March 07, 2012 at 07:20 AM

Can you break out interest rates? How much in delinquent loans will
double and when?

Posted by: bmeisen | March 07, 2012 at 05:36 AM

One reason why U.S. college degrees have become an investment with a
negative return is that a significant number of colleges and universities
have a new business model. Behind the scenes, they now market U.S.
degrees to foreigners as a means to immigrate to the US. While the topic is
arcane, there are no current annual caps on F-1 (student) or J-1 (exchange
visitor) visas. The student, particularly in technology fields, may obtain a
OPT, giving them a 29 month period of employment where the employer
sets the wages and working conditions with no annual numerical caps.
This leads to the H-1B Visa (and several other work visa programs) which
have high annual numerical caps and lax protections for U.S. workers. The
US citizen might train their imported replacement before their job is cut.
These changes amount to a behind-the-scenes foreign-hiring preference
system.

To learn about the political corruption that served as a foundation for this
dangerous situation, please review my 2005 investigative article "Career
Destruction Sites - What American colleges have become"
http://tinyurl.com/nn28sp and my 2007 investigative article "The Greedy
Gates Immigration Gambit" http://tinyurl.com/37l8ry.

See these 2 related stories on the student debt problem.

http://tinyurl.com/Trillion-Dollar-Student-Debt by Dennis Cauchon, USA
Today 25 Oct 2011 and http://tinyurl.com/Seeking-Alpha-Studnt-Loan-
Debt by Nicholas Pardini 05 July 2011.

Posted by: Dr. Gene Nelson | March 07, 2012 at 02:15 AM

Here are the top 100 holders of federal guaranteed student loans as of
Sept. 30. Banks generally mix student loans in with their consumer loans
in their 10K filings, except for the largest two or three. In addition, many
of them are state agencies and nonprofit authorities, whose quarterly and
annual financials are governed by state regulations. Finally, many are
nonbank lenders or privately-held firms, which may have no requirement
to file public financials at all.
http://www.fp.ed.gov/attachments/publications/2010Top100CurrentHoldersPublicReport.pdf
There is unfortunately no way to get a fix on who are the top holders of
private education loans.

Due to the large number of students needing federal student loans each
year, it is not practical to do full-scaled underwriting ("credit check").
Who would do the underwriting (credit check)? Would it be the colleges
analyzing someone's creditworthiness? They are not likely to turn
someone down, due to their interest in the student receiving the loan
funds. Would it be a federal contractor? How would the contractor get
paid? It wouldn't do the work for free. Consider the average amount of
closing costs on an American mortgage -- a lot of it is to pay for the cost of
the underwriting. Formal underwriting is based on more than a FICO
score. Private educational loans have credit checks, and the cost of the
underwriting is generally built into origination fees or the interest rate.

Posted by: Craig | March 07, 2012 at 12:17 AM

The median amount outstanding of $12,800 is less than the cost of a new
subcompact car. The big difference is that the proved differences in
lifetime earnings from greater education far outweigh the loan amount.

It's a strange society when researchers at the Federal Reserve Bank of New
York seem to be concerned that people are going into debt to learn and
advance our society.

The unemployment rate of college graduates is around 5%. It would be far

better for the same researchers to focus their energy on why our
elementary, middle and high schools are not preparing more people for
college and advanced technical schools.

Posted by: Robert Sherman | March 06, 2012 at 04:03 PM

I find good news and bad news from this report. The good news is this:
about 70 percent of student loan borrowers owe $25,000 or less. Thus, for
the vast majorit of borrowers, their indebtedness level is similar to the
amount people borrow to buy cars.

The bad news is this: 70 percent of people with past due loans are thirty
years of age or older. Thus, a lot of people are well into midlife and are
apparently unable to service their student loan obligations.

Posted by: Richard Fossey | March 06, 2012 at 11:36 AM

Thanks to our readers for the comments. Cameron Payne asks if we have
data on the universities associated with these loans. Unfortunately, our
data don't give us that information. CollegeRC nicely points out the trade-
off between the costs and benefits of making educational credit widely
available. One important dimension here is that educational loans are the
first experience with debt for many young borrowers, and they thus have
thin credit records prior to getting those loans.

The FOMC blackout period begins today, and we'll be back online March
19.

Posted by: Blog Author | March 06, 2012 at 07:45 AM

You need to provide more specific definitions to explain your analysis and
results. From the broad strokes, it appears you are counting many non-
delinquent borrowers as delinq., and you are trying to make the
denominator as small as possible. Borrowers who are 1-30 days past due.
are Current, not delinq. Accounts where the default claim has been paid
by the guarantor are defaulted, not delinq. They should neither be in the
numerator nor the denom of a delinq. rate. While very few borrowers
choose income-based repay, those loans are money-makers for the govt
whether or not their balance happened to decline that year. Furthermore,
counting them as delinq. when they are choosing a plan which is legit
under the law seems incorrect. Borrowers who have filed for bankruptcy
are not delinq.; in fact the lender can't bill them even if it wanted to, until
the court process is resolved.

Borrowers during the in-school and grace period statuses are not delinq.
This is not a period of laziness or sloth. These are arguably your lowest-
risk borrowers, your (near) future profit centers. They should not be in the
denom., but they definitely should not be in the numer. either. It is
debatable whether deferments and forbearances should be in the denom.,
but they definitely should not be in the numer. However, think about it, if
you take def/forbs out of the denom., then what is left there? Just delinq.
and current repayment? Minus the repayment plans you don't like?

Posted by: Mossup | March 06, 2012 at 07:27 AM

Is there anyway to get a breakout of enrollment in Income Based

Repayment? The borrowers enrolled in this program will not show up as
being in default, but if you're not even paying the interest on a loan what
else can it be?

Posted by: Niezenger | March 06, 2012 at 12:38 AM

Does anyone know where I can go to find information on the institutions

that hold student loan debt? Based on the 10K filings of the major banks it
does not appear that they break out student loans in there loan portfolio.

Posted by: Ben | March 05, 2012 at 07:20 PM

"Federal and state governments are deeply involved in the student loan
market, either directly originating student loans or indirectly guaranteeing
them."

Part of the reason why student loans appear to be so complicated is the

nature of Federal loans being guaranteed to every applicant regardless of
credit.

Of the roughly $1 trillion in outstanding student loans, the overwhelming

majority is Federally originated or was backed by the FFELP program
before it was eliminated. Most of these loans are Stafford loans. (Parent
and Grad plus have a nominal credit review with relaxed approval
standards compared to credit based loans) Because all Stafford loans were
approved without a credit check, the Gov't is now on the hook for Billions
if borrowers do not repay, so the bankruptcy laws that are seemingly
unfair to borrowers will not change in the near term.

Best way to deal with this would be to stop guaranteeing loans without a
credit check. This would be a positive turn in financial responsibility for
our Gov't, but many citizens would be unhappy to lose access to
guaranteed Gov't loans for college access. It seems impossible to have it
both ways while making everyone happy.

Posted by: CollegeRC | March 05, 2012 at 04:47 PM

I was disappointed to see there is no breakout of for-profit colleges and

universities such as Phoenix. Is this information available elsewhere?

Posted by: Cameron Payne | March 05, 2012 at 11:36 AM

The comments to this entry are closed.