Those statistics are according to the New York Fed Reserve Bank and finaid.org, an organization that provides financial aid information to the educational community.
Incredibly, about half of those student loan debts aren’t even being repaid. According to the Department of Education, about 7 million of the more than 40 million borrowers are currently in default on their loans, while millions of other loans have not begun repayment, are deferred or in forbearance, or in a “grace” period. As of mid-2014, 90-day delinquency rates for student loans - at about 12% - have doubled since 2003, and now exceed those of mortgages, auto loans and even credit cards.
Student loan delinquency rates are understated because they only include the percentage of loans already being paid on. But as loans move to the stage where payments are required, a sizeable percentage quickly becomes delinquent. In addition, official default rates typically measure the percentage of delinquent loan at just 2 or 3 years into repayment. But with each year thereafter additional borrowers will default. Analysis by the New York Fed shows that of borrowers from 2005, 2007 and 2009, 2 and 3-year default rates generally doubled by the time those loans were 5-7 years into repayment. A report by the Federal Reserve Bank of New York estimates that by 2012, 35% of borrowers under the age of 30 were already delinquent on their loans. Student loan amounts considered “seriously delinquent” now exceed those of auto loans, home equity lines of credit and credit cards combined.
The number of student loan borrowers and their average loan balance have grown sharply over the last decade. The percentage of 25 year-olds with student debt increased from about 27% in 2004 to 45% by 2013, and still rising. The average level of student loan balances increased about 77% in the past decade, from about $15,000 to about $27,000. It should be noted that about 40% of borrowers have less than $10,000 in student debt, but the extent of the debt, combined with the weak economy, has led a significant portion of borrowers to limit the amount they are able to spend in other areas, notably in the areas of new houses, new cars and, as I discussed in a previous article, even marriages.
In the graph below I looked at how homeownership rates have fallen among younger Americans and how their student loan debt has risen. This is a reversal of the multi-decade trend where the percentage of younger Americans buying homes was increasing, particularly those with college education. Homeownership peaked near the beginning of this century, but for the last decade or so has more or less been in freefall, as can be seen in the graph below. This is despite rock-bottom mortgage rates for most of the last decade.
These two opposing trends are powerful ones, and don’t appear to be weakening at all. The growth in student loan debt has been accelerating the last couple years, while the year 2014 saw the fastest decline in homeownership rates among young Americans within the last decade.
Of course there are many factors that go into the decision to buy a house and correlation is not necessarily correlation. However, the degree of negative correlation between these two age groups’ homeownership rates and student loan debt accumulation is rather astounding at a - .95 and -.96, respectively, showing nearly perfect inverse correlation.
This relationship may be influenced by the other factors, but it should be noted that at least until the last decade, students who took out student loans were more likely to take on a mortgage and home than those without student loan debt. This was because experience showed that college students taking on student loans were generally quickly entering a path of higher income and had an increased ability to make monthly mortgage payments despite their student loan payments. But since 2012, those carrying student loans are now less likely to take out mortgage loans compared to those without student loans. And of course, if the number of new mortgages taken out among the young continues to fall, so will the decline in their homeownership rates.
As average student loan balances increase along with student loan delinquency rates, credit scores among many of the debt-burdened young are falling. Good credit scores are essential for getting an auto loan or mortgage. In the past, it was not usually seen as a negative for a college graduate to carry a student loan. In fact, it was often seen as a plus. Having a student loan balance, but one in which payments are consistently paid on time will usually boost the borrower’s credit score and thus make it more likely to get a loan for a car or house. However, when such a high percentage of student loans are deferred on their loans or already delinquent, mortgage and auto loan lenders are justifiably concerned about extending more credit to many of these students.
As with mortgages, in the past, young Americans with student loans were more likely to take out auto loans. On average, those Americans with some college under their belt would earn a higher income compared to those with less education and be more willing to take on an additional monthly payment. But as the chart below shows, over the past several years, the percentage of Americans age 25 with auto debt has declined significantly for those with student loans, much more so than those 25 year-olds without student loan debt.
According to information from credit agency Equifax, until about 2008, average credit scores for 30 year-old Americans was nearly the same, about 640 in 2008, whether or not they had student loans. Since then, those with student loans on average saw their credit score (in 2013) fall to 636, while those without student loans saw their average scores increase to 661. Mostly likely, a significant contributor to this gap in credit scores is due to higher delinquency rates among a sizeable portion of those holding student loan debt. Among student loan borrowers, staying current on the repayment of their loans is crucial to keep their credit scores up.
Those credit scores are important because directly impact the loan rates offered to borrowers. Credit reporting agency Experian reported that in the second quarter of 2015, the average auto loan rate for a borrower with an “average” credit score (so-called “prime borrowers”) of 661-780 was just 3.63%. In contrast, the average loan rate for a “subprime” borrower with a credit score of 501-600 was 10.91%. Deep-subprime borrowers, those with credit scores under 500, paid an average auto loan rate of 14.51%. Staying in the category of prime borrower is critical to get a reasonable auto loan rate, and staying current on student loans is an essential step to maintaining a high credit score.
The sharp rise in student loans will only work, at a societal level and an individual one, if they are truly providing a positive return on investment. In the past, college, and associated student loans, were seen as a sure path to increased employment and productivity. But over the past decade, this relationship has become less clear. Rising levels of student loan debt and delinquencies have led an increasing number of young Americans to put off buying cars and houses and many now regret the choices they made with their student loans.
In 2013 the American Institute of CPAs published the results of a survey where it found that 75% of student loan borrowers said they or their children have made a personal or financial sacrifice of monthly student loan payments. Forty-one percent said they postponed contributions to retirement plans because of the payments, 40% delayed car purchases, 29% delayed buying a house, and 15% postponed marriage. Sixty percent of those surveyed said they had some regret in the way they paid for their college expenses and only 39% of borrowers said they fully understood the burden their student loan debt would put on their future.
It does not have to be the case that young Americans have to follow in the footprints of their parents, but traditional cornerstones of the “American Dream”, such as a home, a car or marriage are becoming much less common among younger Americans. And student loans, which in the past, were thought of a springboard to a better life in the future, are now becoming a heavy burden to many.