Consumer household debt peaked in the third quarter of 2008 and then fell sharply over the next several years, spurred by the Great Recession. Over the last three and a half years, consumer debt resurged and had progressively grown each quarter Consumer household debt reached balances of 12.6 trillion dollars in the last quarter of 2016, just shy of the all-time high of 12.9 trillion.Widespread defaults on both secured and unsecured loans led to financial institutions tightening lending requirements and rejecting applicants with strong credentials.
According to a recent New York Fed Consumer Credit Panel (CCP) report, based on data provided by Equifax credit report information, lending parameters differ from those in 2008, changing the debt landscape.For example, the median credit score for a home loan was just over 700 in 2006 but reached a median of 760 for loan approvals in 2016.While borrowing levels inch toward new benchmarks, loan allocation heads in a new direction. By the end of 2016, home mortgages, lines of credit and lending tied to home ownership remained nearly 1 trillion dollars below 2008 levels while increases in loans for transportation and student loans filled the gap. From 2006 to 2016 student loan balances increased by 671 billion and vehicle loans rose by 367 billion over the same time, totaling 1.038 trillion dollars in additional consumer debt.
Snapshot of Today’s Borrower
In 2008, borrowers over 60 held only 15.9% of the total household debt. Today that same age bracket accounts for 22.5% of consumer debt as seniors refinance homes and take out student loans later in life. Overall debt balances for individuals under 50 fell partly due to the increased difficulty in obtaining loans.
With the increase in debt for older Americans, credit quality of borrowers also went up, lowering the risk to financial companies. For example, debt balances for consumers with high credit scores of 760 or above grew by $878 billion dollars from 2008 to 2016. On the other end of the spectrum, subprime borrowers have seen borrowed balances fall by $752 billion since 2008.
The over 60 population is the fastest growing segment for student loans.The trend leading more seniors to take on additional debt late in their careers creates a more stable loan portfolio for lenders because older borrowers have shown responsible lending habits for several decades. However, the risk of retirees carrying that debt into retirement puts their income and standard of living at risk when income drops after work ends.
Many seniors deal with the increase inthe debt loads by remaining in the workforce longer, which can impact the employment opportunity for younger workers prepared to replace them.
Impact on Home Ownership
Nearly a trillion dollars in falling debt balances from the mortgage industry over the last decadeis not strictly due to paying down mortgages and remaining in homes longer. In 2016, the rates of homeownership fell to a 50-year low of 62.9%. Tighter lending requirements, stagnant wages, rising home prices, and large student loan balances all play a role in locking Millennials out of the housing market. The economic impact of lower home ownership levels has a ripple effect throughout the entire economy.
Those attaining a college education continue to fare better in the long run,despite the rapid increase in student loan balances at graduation and lower rates of home ownership. Even after considering debt, attending college leads to higher rates of home buyersgraduating with student loans,but, leading to purchasing of homes at a slower rate than those without student debt. Studies, which compare the level of education, with a college degree or with only a high school diploma regarding spending habits and long-term income projections,the numbers continue to support the need to attain a college degree and even post-graduate degrees.
Student Loan Trends
By the end of 2016, college graduates accumulated 1.3 trillion dollars in student loan debt which translates to a 170% increase over the last decade. Not only have balances increased, but the rate of paying off student loan debt after completing school fell.
Students who obtain an advanced degree make up a smaller portion of graduates, but, account for much higher loan balances which can skew the data on graduation balances. For example, only 5% of students graduate with over $100,000 in student loan debt, which, most often, represents obtaining an advanced degree. However, these borrowers make up 30% of the total student loan balances. This statistic means the average student completing an undergraduate degree, will likely carry lower average loan balances upon completion of school. College students finishing school with loan balances below $25,000 make up 65% oftotal student loan balances. These statistics, however, only include public and non-profit schools for students who graduate. Adding to the student population, which fails to complete a degree and those from for-profit universities, would drive the numbers upward. Students completing school from for-profit intuitions tend to have 43% higher loans than those from public or non-profit schools.
With rising student loan balances, today's graduates can find it difficult to achieve other milestones such as home ownership.High paying jobs tends to require higher levels of education, leading to the need for advanced degrees, and continued education, beyond the initial bachelor’s degree. Despite the drawbacks of repaying student loans for more than a decade, those with a college education find more employment opportunities and higher levels of income throughout their career.