Rising Student Debt

March 6th, 2013 / By Deborah J. Merritt

Student debt has risen to unprecedented levels. The total approached a trillion dollars by the end of 2012, and the figure continues to rise steeply. According to a recent report from the Federal Reserve Bank of New York, student loans were the only type of household debt that continued to rise throughout the Great Recession.

Mortgage debt, which currently totals eight trillion dollars, still overshadows debt from student loans. But student debt now constitutes the second largest category of consumer debt, drawing the attention of economic forecasters.

Student debt provokes concern, not only because of its size, but because of increasing delinquency rates. Student loans now lead all other categories of consumer debt on non-payment: 11.7% of student loans are at least 90 days delinquent. Delinquency rates for student loans, furthermore, show a sharp upward trend (p. 9), while those for other types of household debt are declining.

Even those figures underestimate the looming shadow of student debt. As the Federal Reserve Report notes in footnote 2 of its report, “delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in grace periods, in deferment, or in forebearance and therefore temporarily not in the repayment cycle.” The delinquency rate for student loans that have actually entered repayment is “roughly twice as high” as the 11.7% official rate. For more discussion of this issue, see this post on Liberty Street Economics, a blog authored by some of the economists working with the Federal Reserve Bank of New York.

So both student debt and delinquency rates on that debt are growing rapidly. What impact will those phenomena have on individuals and the economy? No one knows for sure, because our economy has no experience with student debt of this magnitude. The mechanics of student loans–which feature private and government lenders, deferral periods, and changing repayment plans–are also more complicated than other types of household debt.

Recent analyses by the economists at the NY Federal Reserve Bank, however, raise red flags about the impact of student debt. The economists found that “the growth in student loan balances and delinquencies was accompanied by a sharp reduction in mortgage and auto loan borrowing and other debt accumulation among younger age groups.” These declines were “greater for student loan borrowers and especially so for those with larger student loan balances,” suggesting a causal relationship. Highly indebted graduates, in other words, seem to be deferring home and car purchases. Those decisions have implications for both the individuals and the economy.

Higher education is an engine for economic growth; it enhances the productivity of most workers. But what happens to the economy when educators claim an increasing share of that productivity? The growth in student loan debt reflects dramatic increases in tuition at colleges and graduate programs. Those increases mean that educators are demanding, up front, a larger portion of the productivity gains they help students achieve. Many of today’s graduates, especially those with high professional school loans, will spend half their working lives repaying those debts. Rather than using their full productivity gains to invest in houses, cars, or the educational future of their own children, they will send a significant portion of each paycheck to their educational creditors. We don’t know yet how that shift will affect the economy, but the early returns are troubling.