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Student debt goes up and up

Mitchell Hartman Aug 13, 2015
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The Federal Reserve Bank of New York reports on household debt for Q2 2015 on Thursday. The report covers the major types of debt Americans take on: home mortgages, car loans, credit card debt, and student loans.

Total household debt as of March 31, 2015 (Q1) was $11.85 trillion, up 0.2 percent from the previous quarter. Total indebtedness was 6.5 percent below the peak hit during the early phases of the Great Recession, in Q3 2008, of $12.68 trillion.

As the recession played out and the economic recovery took hold over the past several years, American consumers de-leveraged from debt, paying off credit cards and refraining from using them again. Many people lost their homes to foreclosure. And vehicle purchases — along with the loans to finance them — plummeted.

“But one thing that kept on growing was student loan debt,” says economist Chris Christopher at IHS Global Insight. The ranks of borrowers have swelled — both among young people attending college for the first time, and middle-aged workers seeking additional credentials to boost their employment and income prospects. Education costs have continued to rise well above the rate of inflation as well. The result: student loan debt has ballooned to $1.2 trillion, outpacing auto loans ($0.97 trillion) and credit card debt ($0.68 billion).

As the economy has improved, Americans have gradually increased debt loads for houses and cars. But fewer Americans are now falling behind on their payments than a few years ago, and economists are generally not concerned about consumers getting in over their heads. Delinquency rates have declined in recent quarters for all types of debt except education debt, where delinquencies are on the rise: the rate was 8.9 percent in Q1 2010; it was 11.1 percent in Q 1 2015.

Christopher says that’s worrisome because of how difficult it is for people to get out of student loan debt they can’t realistically pay off in the future. “There are a couple things you cannot run away from in the U.S. — taxes and student loan debt,” he says.

In fact, student loan debt may be even more of a drag on affected households and the economy than the delinquency rate alone indicates. In a note in its May 12, 2015, release on household debt for Q1 2015, the Fed states: “Delinquency rates for student loans are likely to understate actual delinquency rates because about half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle. This implies that among loans in the repayment cycle delinquency rates are roughly twice as high.”

There are also some troublesome trends in auto lending, explains Greg McBride, chief economist at Bankrate.com. He says subprime auto loans to buyers with poor or insufficient credit, which come with higher-than-average interest rates and often have long repayment terms, are on the rise.

“Lenders are willing to make these loans because the loan performance is so strong, and the collateral is so easily repossessed,” says McBride. “You miss more than one car payment, the car won’t be in the driveway in the morning. People who know they need the car to get to work will find a way to make the payments, so delinquency rates on auto loans are very low.

“Stretching payments out over a longer period of time just to keep the payments manageable is a recipe for trouble down the road,” McBride continues. “You’re going to stay upside down on that vehicle even longer, which puts you in a financial bind, especially if an accident happens. And the interest tally grows over that time.”

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