ECON430-Topic #2: Growth of Credit and Household Formation

Credit and debt are two distinct things, yet they are related. For example, if you are a personal credit card holder, you are offered a “line of credit” that you may or may not use. If your “line of credit” is $10,000, that means you can borrow up to that point, but might not utilize any of that credit. If you borrow say, $4,300 by purchasing goods with your credit cards, your credit card “debt” is $4,300, but your credit is $10,000. You might be offered an increase in your credit line by your bank, and you might use this opportunity to increase your debt (or you might not). You might also have a bank close your account on you, or you could elect to close the account yourself. Businesses also have access to “lines of credit” from banks, and they might utilize them when they need to borrow money. Unfortunately, right when one firm decides they need money, many others might do the same thing, leading banks to cut lines of credit.

Here we explore how aggregate household debt has been changing over the last few years. Early in the year aggregate household debt was rising rapidly to $11.8 trillion, but it was still below the levels that it hit at the previous peak of $12.7 in 2008. Household debt–includes mortgages, credit cards, auto loans and student loans–has a cyclical feature (click on 1st graph to see). Non-housing debt is now at $3.24 trillion, as student loan ($1.2 T) and auto loan debt ($1 T) is on the rise (click on 2nd graph to see). Rising debt is usually associated with rising delinquencies, as increased debt burdens lead to more people being unable to pay their bills on time. It is notable that we are seeing rising delinquencies in student loans (11%) and falling (or flat) delinquencies in car loans and mortgages (click on 3rd graph to see). A recent note issued by the NY Federal Reserve explains these trends in some detail: Auto Loans Race Ahead, Foreclosures Plunge, and Overall Household Debt Remains Flat. The full Fed report provides a lot more detail on this issue, and it is a lot of charts so it is not that difficult to read.

In spite of the rising issuance of auto loans, the interest rate on these loans is near its all-time low. Student loans are on the rise, but these interest rates are often fixed by the government, and are also at very low levels. So, in some ways, banks are looking for places to lend money, and they might be willing to do it at low interest rates because they do not have great alternatives. Since home purchases have remained relatively stagnant, what does this say about our economy and the business cycle?

Questions You Might Address

  • Why are student loans rising so rapidly, along with delinquencies? Many stories have been written about how young college graduates are not starting families because they have college loan debt that prevents them from buying houses and cars. Maybe you are not aware, but college loan debt is the most difficult of all debts to discharge, mostly because of its completely unsecured nature, and highly subsidized rates. College graduate unemployment rates are high, and many find it difficult to navigate the job market after graduation. We like to put a lot of emphasis on the numerous media reports about rising tuition, but the “net price” of tuition has actually not risen that much. So, why has student loan debt risen so much? What does it mean to be delinquent on these loans, and most importantly, what does this have to do with the business cycle?
  • Credit cards, HELOC (home equity lines of credit), and personal credit lines are all ways of issuing credit to consumers, in ways that they will “hopefully” increase their debt and pay interest to the lenders. What has been happening in these markets, and what does this have to do with cycles or monetary policy? We can see in the Fed’s report (starting on page 4) that credit access peaked in the time around the height of the recession, and access to credit also subsequently dried up as banks shut down these lines of credit. You can look here, or for information on firm lines of credit to help explain what might be going on here.
  • You could alternatively address these questions in the mortgage market. If you do, take a close look at the mortgage market for recent college graduates and millenials. Is it true that younger generations simply cannot afford to buy homes, or is something else going on? What does this have to do with central bank policy and business cycles? Or is this a long-run trend?

14 thoughts on “ECON430-Topic #2: Growth of Credit and Household Formation”

  1. In recent years, the job market has shifted in such a way that leads young people to believe that in order to secure a well-paying, stable career, they must attend college and get a degree (1). This shift away from vocational careers creates an increased demand for college educations but does not guarantee that these new students desiring degrees will be able to finance their entire education expense out of pocket. This in turn increases the demand for student loans, a demand which has widely been met by easy access to government-backed subsidies (2, 3).

    While students believe they are borrowing today to ensure their future profitability, business cycle fluctuations largely influence a student’s ability to repay his or her student debt following graduation (4). An economic contraction could create a “weak labor market” as a result of businesses limiting output, and therefore employment, in response to lower aggregate demand for goods and services (5). This constricted demand for labor will limit the quantity of jobs available and make it harder for recent graduates to compete in the market against the growing supply of more skilled workers. If, despite having a college degree, graduates are forced to take a lower-paying job due to unfavorable labor market conditions, their ability to repay their student loans on time will be severely lessened, thus increasing the chances of delinquency (4). In other words, delinquency rates are higher in times of economic contraction because mere possession of a college degree does not always guarantee a wage fit for a college graduate.

    Until fewer citizens demand college educations, the student debt burden will continue to “balloon” and will be exacerbated by business cycle downturns which further hinder the ability of students to repay their growing debt obligations on time (2, 4).

    1. https://reason.com/reasontv/2013/12/13/dirty-jobs-mike-rowe-on-the-high-cost-of
    2. https://research.stlouisfed.org/publications/es/15/ES_7_2015-04-10.pdf
    3. http://www.misesboston.com/2014/07/a-vicious-cycle-fuels-the-massive-student-loan-bubble/
    4. https://www.stlouisfed.org/publications/inside-the-vault/spring-2013/student-loan-delinquencies-surge
    5. http://www.epi.org/publication/the-class-of-2015/

  2. Much of the post-recession decline in the housing market can be attributed to millennials moving back home after college. The percentage of 18-34 year-olds who live with their parents is 26%, up from 24% in 2010, and 22% in 2007(1). The rise in student debt plays a big role in this recent trend – 54% of the millennial generation cite student debt as their biggest obstacle to buying a home (2) – but it’s not the only factor. The millennials are also now battling with the baby boomers who are downsizing and willing to pay a premium: “…boomers are renting apartments and buying condos at more than twice the rate of their millennial children” (3). The millennials that do end up living independently spend between 30-50% of their incomes on rent, so many others decide instead to live at home and save that income (4). Aside from monetary reasons all together, moving back home has lost the stigma of “being a failure”, and many millennials want to “get it right the first time” – meaning they are willing to live at home to allow themselves time to wait for the perfect job that “feels very right but pays poorly” (5).

    Like any current topic in economics, there are mixed predictions about the future of the housing market. Some say that housing will never get back to it’s pre-recession levels: “With the federal funds rate at essentially zero and the Fed having ended its purchase of mortgage securities, the central bank can’t do much to help housing now” (6). Others claim that as the millennials age, they begin to start their own homes (2). Since they are now the largest age group in the country, it is believed that they will be behind two-thirds of household formations over the next five years (7).

    (1) http://www.wsj.com/articles/when-millennials-move-back-home-1442802323
    (2) http://www.businessinsider.com/millennials-are-headed-to-the-suburbs-2015-10
    (3) http://www.washingtonpost.com/business/economy/millennials-top-competition-for-condos-might-be-their-parents/2015/10/17/928dfb58-6b8e-11e5-b31c-d80d62b53e28_story.html
    (4) http://www.pbs.org/newshour/making-sense/saddled-debt-millennials-move-back-home/
    (5) http://blog.penelopetrunk.com/2005/05/15/moving-back-home-with-your-parents-is-a-good-career-move/
    (6) http://www.bloombergview.com/articles/2015-01-23/housing-weak-even-with-government-programs-and-big-bank-interest
    (7) http://fortune.com/2014/12/09/housing-market-2015-predictions/

  3. According to the Federal Reserve’s quarterly report for 2015, the trends in the housing market have led to a decrease in foreclosures in Q2. Specifically, “foreclosures [are at] the lowest point in the 16-year history of the NY Fed’s Consumer Credit Panel” while auto loans and credit loans have increased [1]. Relevantly, borrowers with credit scores above 780 drove under half of the $466 billion in new mortgage originations [1]. However, just 8% of the new mortgage originations were derived from borrowers with credit scores under 660 [1]. A reason for the reduction in mortgage foreclosures and the increase in demand for trust-worthy borrowers is due to stricter “underwriting standards” [1]. The devastating economic effects from the 2008-2009 housing bubble are clearly still felt today: trust worthy buyers looking to purchase homes are making up a significant amount of the people that banks are approving for mortgage loans.
    The request for credit worthy borrowers is seen by the graph titled “Credit Score at Origination: Mortgages [2]. There is a clear and notable upward trend in the amount of credit worthy borrowers applying for mortgages. Specifically, in Q2 of 2015, borrowers with a score of 750 and above make up the median borrowers of mortgages. Has the push for responsible homebuyers driven students who suffer from student debt out of the market? According to The Wall Street Journal, “almost 71% of bachelor’s degree recipients will graduate with a student loan, compared with less than half two decades ago and about 64% 10 years ago” [3]. Clearly, the amount of people with college degrees graduating with college debt has increased over the years. Consequently, this puts a strain on college grads to purchase a home if their credit score is not up to par. Thus, stricter loan terms on borrowers has been a factor in determining the payback rates for mortgage loans and students graduating with college debt might be pushed out of the home-buying market. However, since banks are leaning towards lending to more credit-worthy borrowers in the mortgage market, this may be difficult to sustain depending on how and if college debt is paid off successfully.

    [1] http://www.newyorkfed.org/newsevents/news/research/2015/rp150813.html
    [2] http://www.newyorkfed.org/householdcredit/2015-q2/data/pdf/HHDC_2015Q2.pdf
    [3] http://blogs.wsj.com/economics/2015/05/08/congratulations-class-of-2015-youre-the-most-indebted-ever-for-now/

  4. Between 2007 and 2010, on average, college loans has increased from $26,639 to $32,869 and has continued to increase as higher education has become a necessity in order to secure a job in today’s economy (1). In spite of the recovery the United States’ economy has faced since the economic crisis in 2008, the downturn has, ultimately, changed individuals’ perceptions about “price and higher education” and the easy availability of such student loans has facilitated these changes toward increasing amounts of student loans (1).

    Today, it has become increasingly important to have a college degree in order to increase the likelihood of employment. According to the Bureau of Labor Statistics, 70% of individuals that have at least a bachelor’s degree, whereas only 55% of those who have a high school diploma are employed (2). In spite of the lack of a large differentiation between the two statistics, between 2007 and 2011, the percentages of both decreased and continue to decrease, as it is becoming increasingly important to pursue higher degrees, thus increasing the need for even higher education (3).

    To cope with this demand for higher education, more individuals are turning to college loans to pay for their education. Stafford loans account for 75% of student loans and they do not require credit standards and are “capped at a total of $57,500 for undergraduate” degrees (4). The economic crisis in 2007 hurt many individuals, both, because of the decrease in perception of their wealth and the actual decrease in net worth many faced, forcing many to take on student loans (1). The easy availability of loans, such as Stafford loans, have increasingly motivated individuals to turn to higher education to cope with the increasing educational requirements (4).

    (1)http://www.wsj.com/articles/SB10000872396390444246904577575382576303876
    (2)http://www.bls.gov/news.release/empsit.t04.htm
    (3)http://www.bls.gov/opub/mlr/2013/02/art1full.pdf
    (4)http://www.wsj.com/articles/SB10000872396390444246904577575382576303876

  5. A couple of reasons that come to mind when thinking about why student loans are rising so much are A) People dragging the student debt late into their lives and B) the price elasticity of demand for education. These coupled together is a really big issue. People are dragging the debt into longer stages of their lives, with the growth in debt ages 50+ growing at a higher rate than the other over the past 10 years (1). Student debt is also continually taking up a larger and larger share of overall household debt (2). The result of debt being dragged longer into life often leads to delinquency, which is the inability to make payments on outstanding debt, and in this case, student loans. The nature of being held to pay the loans essentially no matter what means delinquency is not uncommon, because increases in household incomes have not kept up with the cost of loan payments (3). Student Loan payments are cyclical in nature and because of a lack of economic growth in recent years means there are a lot of unpaid loans. Since student loans are not dischargeable, the inability to pay them off leads to less consumption and stifles economic growth which negatively affects the business cycle.

    The price elasticity of demand for education leads to an increase in student loans. If education was a normal good, then an increase in the sticker price by as much as it has would lead to a significant reduction in the attainment of education, which hasn’t happened (4)(1). This could be due to the significant pressure to achieve a 4-year education in order to get a good enough paying job in order to live comfortably. This leads to many people taking on the loans that don’t necessarily have the means to, which causes them to be burdened with the debt for most of their lives.

    (1) http://www.npr.org/sections/money/2012/05/22/153316565/the-price-of-college-tuition-in-1-graphic
    (2) http://www.newyorkfed.org/microeconomics/hhdc.html#/2015/q2
    (3) “The Economics of Student Loan Borrowing and Repayment” https://philadelphiafed.org/research-and-data/publications/business-review/2013
    (4) http://www.census.gov/hhes/school/data/cps/historical/index.html (Table A-7)

  6. When looking at the mortgage market, we should take a close look at the line of credit and amount of debt that recent graduates and millennials occur to get an idea on why home ownership has declined. For any current home owner they always need to keep an eye on their debt to income ratio. This number represents all your monthly payments compared to your monthly pretax income (1). For most home buyers they start by getting a loan to get their home. This needs approval from the Federal Housing Administration (FHA) that is used to check debt to income ratios to see if people qualify for home loans and can actually make their monthly payments.
    Last year student loan debts increased by $77 billion, and delinquencies increased to 11.3%, while total consumer debt has increased by $326 billion (2). These increases provide a problem in the immediate future for recent graduates and millennials to own a home, but in long run it may not be out of reach. For most millennials this is their biggest form of debt that needs to be paid off. Bankrate did a survey that stated only 63% of millennials (ages 18-29) don’t even own their own credit card yet (3). Meaning that debt isn’t increasing too significantly for this age group, and most that only have student loans can actually build a good credit score from this (varying on job type, payments, etc.) when they are starting off on their own. So, when looking at millennials debt to income ratio, they can actually afford homes, but just choose not to. When compared to now, mortgage rates are actually lower than they were back in the 1990s. In the 1990s it was around 10% and today it is around 4%, meaning that on average people will have lower monthly payments than compared to older times (adjusting for inflation) (4). So, it seems as if there is a cultural shift with millennials actually just choosing to go with the cheaper option of renting, rather than jumping straight into the mortgage market.

    (1) http://www.forbes.com/sites/reynagobel/2014/08/30/the-true-impact-of-student-loans-on-credit-and-home-ownership/
    (2) http://www.ibtimes.com/student-loan-debt-increased-77b-last-year-hitting-record-116t-student-auto-borrowers-1819066
    (3) http://www.bankrate.com/finance/credit-cards/more-millennials-say-no-to-credit-cards-1.aspx
    (4) http://fortune.com/2015/08/18/young-people-can-afford-homes-they-just-dont-want-to-be-homeowners/

  7. Given that the purchase of homes has remained relatively unchanged, our economy is still in the recovery stage from the recession of 2008. With low interest rates, banks are putting more concern on the creditworthiness of borrowers because risk isn’t compensated by higher rates. The second quarter of 2015 reveals that of the $466 billion in new mortgage originations just under half of these originations were provided by borrowers with credit scores over 780(1). During this same quarter only 8 percent of borrowers with credit scores under 660 made up these mortgage originations (1). This data recognizes that borrowers with excellent credit are buying homes, while borrowers with fair to bad credit aren’t playing a significant role in this industry (2). These findings can attribute to the fact that the low rates of delinquency and new foreclosures suggest a more stable economy (1).

    Acknowledging this second quarter data on new mortgages, it may provide evidence for why recent grads and millenials cannot afford to buy homes. With the economy still in a recovery stage and low interest rates, banks will likely be unwilling to lend money to younger generations to purchase homes. Considering credit scores for younger generations, the average score for ages 18-24 is 643 (3). According to this score, recent grads and millenials have a credit score on average that is poor. Until interest rates can rise to the point where banks will feel they can compensate the risk of lending to younger generations, the economy’s growth will be stable but also limited.

    (1) http://www.newyorkfed.org/newsevents/news/research/2015/rp150813.html
    (2) http://www.credit.com/credit-scores/what-is-a-good-credit-score/
    (3) http://www.statisticbrain.com/credit-score-statistics/

  8. It is no secret that student loan amounts continue to increase in the United States. A few key factors in the current economy have led to this fact. A major factor in the rising amount of student loans is the dramatic increase in the amount of hours worked at minimum wage to pay for one credit hour (1). An analysis at Michigan State University (MSU) revealed that in 1980 it took a little under 10 hours at minimum wage to pay for one credit hour. The 2013 hours at minimum wage required was just under 60 hours for one credit hour (1). This mean college students must worked 6x more to pay for their tuition and will clearly result in more loans taken out. Another factor in increased student loans is the rising gap in median pay differences between college and high school graduates. A college grad in 1965 only made about $7,500 more per year than a high school grad. In 2013 that number had over doubled to about $17,500 (2). This encourages more people to attend college because the opportunity cost of not doing so has grown.

    Young college graduates face an unemployment rate of 7.2%, up from 5.5% in 2007 (3). This increase comes from the labor market suffering following the Financial Crisis and new college grads suffering the most from the lack of employment opportunities. Business cycles impact recent college graduates in a more extreme manner than older, more seasoned workers (3). During an economic boom, recent college grads are rewarded more than other workers; during a downturn in the economy, recent college grads suffer more than other workers.

    All of these factors lead to a higher delinquency rate on student loan payments. As college students are forced to take out increasingly larger loans to graduate in a tougher economic climate, their ability to pay back loans decreases. The WSJ reports that almost 7 million Americans failed to make a student loan payment over the previous twelve month period (4). All of these factors will possibly drive this number even higher as the business cycle continues to roller coaster up and down and impact the ability of millions of Americans to pay back their student loans.

    (1) http://www.randalolson.com/2014/03/22/its-impossible-to-work-your-way-through-college-nowadays/
    (2) http://www.usnews.com/news/articles/2014/02/11/study-income-gap-between-young-college-and-high-school-grads-widens
    (3) http://www.epi.org/publication/the-class-of-2015/
    (4) http://www.wsj.com/articles/about-7-million-americans-havent-paid-federal-student-loans-in-at-least-a-year-1440175645

  9. The reason of why student loans continue to rise rapidly is mainly because of the financial illiteracy in today’s society and the easiness of obtaining such loans. Most people believe that achieving higher education will reward them with higher income jobs. While this may be true because there is a correlation with higher income and higher education, it could be argued that higher education does not guarantee higher income jobs or financial success. In a recent article “College Degree for Everyone?” Vitaliy Strohush and Justin Wanner studied the return of investment in a college degree education. Their findings suggested that “in 1964, a college degree was still a positive net investment regardless of the cost; it was no longer the case in 2010.” (1) Strohush and Wanner suggested that 13% of college graduate are better off by not going to college. This study is not taking in consideration the fact that no all students finish their education. According to the National Center for Education Statistics, “about 59 percent of students who began seeking a bachelor’s degree at a 4-year institution in fall 2007 completed that degree within 6 years.”(2) If these students were properly advised they probably opt not to pursue a college education and obtain students loans for practically no reason. In addition it is important to recognize that these student loans have a very high probability of becoming delinquent.

    Now let’s take a look at the student loan process. Student loans do not need any type of collateral like mortgage loans, home equity loans, or car loans. Student loans are not approved based on the individual capacity of payments since the majority of students don’t have an income. Student loans are not approved based on a credit scoring system. The only requirements to qualify for financial aid according to the Office of the U.S Department of Education are: to have a GED or High School Diploma, to be registered in an eligible program, to be registered in Selective Service (if male), to have a valid social security card, and to sign a certifying statements of the Free Application for Federal Student Aid (FAFSA). Also you have to meet the requirements of legal status in the United States. (3) None of these requirements take in consideration the future capacity or willingness of the student to produce an income.
    (1) Strohush, Vitaliy; Justin Wanner. 2015. “College Degree for Everyone?” International Advances in Economics Research. http://eds.b.ebscohost.com/eds/pdfviewer/pdfviewer?vid=2&sid=817bc13c-715a-47bb-952a-4b9fb4e931f5%40sessionmgr114&hid=108
    (2) http://nces.ed.gov/programs/coe/indicator_cva.asp
    (3) https://studentaid.ed.gov/sa/sites/default/files/FSA-Eligibility-11.16.12.png

  10. The year you graduate has everything to do with chance (as a function of the time of enrollment, and time taken to graduate), and very little to do with thought and analysis of business cycles. However it may be advantageous to strategically plan out your graduation. The generally held belief in regard to college is that getting a diploma opens doors to higher starting wages, and a higher max salary during the peak of the prospective students career. But if that student graduates during a time of recession he or she may have been better off pursuing the noble occupation of carpentry. It’s true that much has to do with the reputation of the institute and the major of choice, but even with these variables in play, graduating during a period of economic expansion is highly undervalued.

    A college degree is promoted by so many Americans who want a better life for their kids, but the sad truth is that most bright-eyed youth have their parent-instilled dreams of a better tomorrow crushed by the reality that we live in a country still facing dire straights remnant of the Great Recession. Newly grads have traditionally been the go-getters with ideas for starting businesses and innovating industry. Working with little to no overhead, and no real responsibility it is easier to take risks and try to see visions become reality. However when a $29,000 debt is put on your plate (2), that’s a whole helping of overhead, and so only the newly grads hungry enough for seconds take a bite out of the real opportunities their parents dream of when they you off.

    Investing in a college degree is thought of as relatively risk free, but entering an already bloated labor pool is causes more stress than excitement. Since workers recently laid off from the Great Recession offer more experience the competition becomes even stiffer for newly grads (1). Instead of setting a course for winds of fortune we’re forced to bail out the oncoming water of student debt, and jumping ship isn’t an option because declaring bankruptcy doesn’t affect student loans. Instead of trying to open restaurant with some likeminded entrepreneurs more students are trying to get safe jobs at large companies.

    While its true that only the very rich pay “sticker price” (3) for college the price has been going up just because the academic institutions that set the price can get away with it using scholarships and grants as an effective tool for price discrimination. Sadly what you get is hardly what you pay for. College has become an opinion factory where ideas are mass-produced, and everyone is too stressed to have focus on learning, growing and having fun. Instead a disturbing amount of focus is put on striving for the highest possible GPA. Sacrificing integrity for profits is not a good sign for any institution and especially bad for an academic one.

    Still student debt is just part of a bigger problem. Higher education is a wonderful opportunity to learn and hone skills to utilize throughout life, but is not taken for what it is. Rather its perceived as a bourgeois hoop that we have to jump through to get from the hood life to the good life. And as a result far too many students go to college straight after high school than there is a demand for. It would make sense for todays prospective college students to take some time to save money and enroll in college later. America is still very much so recovering from a bad recession and so college graduates today will hardly see the higher wages they worked so hard in college for. As a result their total lifetime salary will be considerably smaller, since the max wages you receive is a function of your starting wage.

    Another result is inability to repay the loans so hastily taken out, and ensuing delinquency. It would be wise to take a smaller wage until the economy shows real signs of improvement and then to utilize student loans to try to get in on some of the superior wages. Alas business cycles are not really taken into account whatsoever when enrolling in college and taking out loans. And so the problem of rising student debt continues with no avenue for many newly grads to pay off their loans that are no longer subsidized after graduation if they ever were.

    (1) http://www.epi.org/publication/the-class-of-2015/
    (2) http://money.cnn.com/2013/12/04/pf/college/student-loan-debt/
    (3) http://www.npr.org/sections/money/2012/05/22/153316565/the-price-of-college-tuition-in-1-graphic

  11. Credit card debt has grown over the past decade, but has remained somewhat constant relative to other lines of credit such as mortgages and student loans. The credit lines for credit cards available from 2004 to 2008 jumped nearly 34%, but the balance of the debt itself remained nearly constant during this time, only increasing by 6% (2). Although the balance of the debt itself does not see to move in the same cycle as the economy as a whole, the line of credit available does. Productivity shocks could be one explanation for this trend. When positive productivity shocks occur, such as the boom before the recession in 2008, credit lines are opened to allow for more spending (4). Asset prices then increase because of the availability of credit, which in turn raises demand for assets by those who are purchasing those assets. Aggregate activity is amplified simply because credit lines are opened (1).
    From 2006 to 2012, the number of households that carry some credit card debt has remained very stable, ranging from 47.8% to 43.2% over the 6 year period (3). The average magnitude of the debt over the same period by households that carry debt ranged widely from $19,000 during the worst parts of the recession in 2008 to only $15,500 in the middle of 2012 (3). Many seriously delinquent accounts were charged off during this time, reducing the total amount of credit lines available. The reduction in credit lines has an opposite effect of the opening of credits lines, causing an amplified reduction in productivity (1).

    1. https://www2.bc.edu/~iacoviel/teach/0809/EC751_files/credit.pdf
    2. http://www.newyorkfed.org/householdcredit/2015-q2/data/pdf/HHDC_2015Q2.pdf
    3. https://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/
    4. https://www.princeton.edu/~kiyotaki/papers/Credit-and-BusinessCycles.pdf

  12. Recently the percent of people owning a home hit a 48 year low of 63.5% (1). Many people believe that this is an indication of a declining economy and that the market is at the low end of a business cycle so people are not taking out mortgages (1), but others believe there is something else going on. A Fortune Magazine article (2) assert that the declining mortgage market and subsequent home-owning is a result of a Millenial’s sense of waiting, the same way they wait to have kids and get married . This is also extending into buying a home, since the average time people are transitioning from renting to buying is now 6 years, even though loan interest rate payments are lower than they were 20 years ago (2).

    Alternatively, other articles (3, 4) assert the opposite about Millenials’ desire to buy homes. They purport that Millenials want to buy homes but student loan debt, lack of enough liquid funds and poor credit prevent them from getting a home. Mortgage lenders are approving loans with lower credit scores and less of a down payment now (3, 4).

    However, an article from Economics21.org asserts that the Central Banking Policy and Federal Reserve are hurting Millenials and largely responsible for them not owning homes (5). Since there is a political element to the choices The FED makes, even after the subprime mortgage disaster, and that “a slow economy disproportionately affects new entrants into the labor force” (5), The FED is largely responsible for the lack of Millennial home owners. Housing prices are “artificially” as high as they are because The FED keeps manipulating the market’s interest rates (5). The stock market is also out of Millenials’ access because they are too young to have gotten enough money to invest, even though The FED keeps the rates low. So The FED just adds to the wealth of those older than Millenials who have had a chance to work (5). This seems the most likely candidate because The FED stays out of the news and has a direct impact on lending, markets and buying houses.

    References (1) http://blogs.wsj.com/economics/2015/07/28/u-s-homeownership-rate-hits-48-year-low/ (2) http://fortune.com/2015/08/18/young-people-can-afford-homes-they-just-dont-want-to-be-homeowners/ (3) http://money.cnn.com/2014/06/01/real_estate/millennials-squeezed-out/ (4) http://www.inman.com/2015/08/24/the-real-reasons-millennials-arent-buying-homes-part-1/ (5) http://economics21.org/commentary/millennials-attention-monetary-policy-inflation-federal-reserve-07-13-15

  13. According to the National Center for Education Statistics, in 1990, the total undergraduate enrollment in ‘degree-granting postsecondary institutions’ was 12 million. In 2013, this number increased by 46% to 17.5 million students (7). Although the ‘sticker price’ of colleges has risen substantially over the past couple years, the increases in net cost of college haven’t been as sharp (8). However, the costs of college are become relatively more expensive. “The cost of higher education has grown far more rapidly than median family income” which prompts more students to seek out aid to pay for what they hope is an investment in their future earning potential (3). Over past decades there has been a marked rise in student loans, but less in response to an increase in the price of college and more in response to an increase in the amount of students attending (4).

    With any rise in loans, it is conceivable that delinquencies (late/overdue payments) and defaults would subsequently rise- but student loans are a little more unique. Student loans are rare in that there “unlike virtually all other forms of credit, student loans are generally not underwritten” which means they are offered to borrowers with little/no credit history and no real assessment of an ability to repay (5). Facing uncertainty of repayment and low interest rates, “the government takes draconian measures to make sure it gets its money back, making it basically illegal to discharge student debt in bankruptcy and reserving the right to extract payment from people’s wages, tax returns, and Social Security income, in some cases” (5).

    In result of this troubling relationship between borrower or lender, delinquent payments on student loans (over 90+ days late) has increased to 11.3%- a steady increase since 2003 (9). Given the fact that “the federal student loan bill stands at $1.2 trillion” and is expected to double in the next 10 years (1), the uncertainty of default on “tax-payer backed loans poses an acute risk to the economy’s recovery” (2). With this fact in mind, it makes more sense why the government has made it so impossible to declare bankruptcy on student loans and have done very little to curb student lenders such as the Education Credit Management Corporation (ECMC), which have used litigation and tactics bordering on “ruthless” to claim student loan payments or impede borrowers from attaining relief they might need (2).

    Student debt is increasing and the increase in delinquency and risk of default puts the government in a tough position with federal student loan programs worried about insolvency and the collapse of the student loan system. On the other hand, it is important to consider the extended effects of increased student debt on the younger generation. It has been argued that this increase in debt obligations could develop into further problems: “if more Americans run into trouble paying these debts, that could crimp their ability to make other purchases and form households, chilling the broader economy (9). In 2014, the Director of the Consumer Financial Protection Bureau Richard Cordray “compared the student loan environment to the ‘broken mortgage market before the crisis’” (6). As student loan debt increases and graduating college feels more like a burden, ripple affects throughout the economy might point to another financial bubble bursting in the future (6).

    1 http://www.bloomberg.com/news/articles/2015-10-08/this-court-case-could-unshackle-americans-from-student-debt
    2 http://www.nytimes.com/2014/01/02/us/loan-monitor-is-accused-of-ruthless-tactics-on-student-debt.html?_r=0
    3 http://www.epi.org/publication/the-class-of-2015/
    4 http://www.npr.org/sections/money/2012/04/18/150909686/what-america-owes-in-student-loans
    5 http://www.bloomberg.com/news/articles/2015-03-04/this-fed-official-just-perfectly-described-why-student-loans-are-a-terrible-investment
    6 http://www.forbes.com/sites/halahtouryalai/2014/02/21/1-trillion-student-loan-problem-keeps-getting-worse/
    7 http://nces.ed.gov/programs/coe/indicator_cha.asp
    8 http://www.npr.org/sections/money/2012/05/22/153316565/the-price-of-college-tuition-in-1-graphic
    9 http://www.wsj.com/articles/u-s-household-debt-rises-slightly-in-to-11-83-trillion-1424188820

  14. Overall, household balance sheet quality is improving but increasing student debt loads and the lifetime debt burden it creates are weighing on economic growth and will continue to do so for years to come unless something is done.

    Post 2008, US consumers have been experiencing a period of deleveraging as seen by the steady decline in the amount of household debt as a percentage of GDP. This measure has declined from a pre-recession level of 98% to a current level of 79% (1). Consumers have altered their behavior to focus on paying down debt as well as prudently saving for the future. This is evidenced by mortgage and auto loan delinquencies declining /remaining flat (2), the savings rate stabilizing at around 4.5% after peaking at 11% in 2012 (3), and consumer’s Financial Obligations Ratios steadily declining to 15% from pre-recession highs of 18% (4). In general, US consumers are becoming more financially secure as seen by healthier household balance sheets.

    Although balance sheet quality is generally improving, student loans are becoming an increasing headwind to consumers’ ability to spend and invest for their future and as a result creating a drag on economic growth. Unlike other debts, the amount of student debt outstanding has continued to increase following the 2008 crisis (5). Since the majority of student loans are administered by the federal government, tight credit/lending conditions as a result of the 2008 crisis did not affect student loan origination (5). As many workers were displaced following the crisis, they returned to school in hopes of gaining valuable skills that would enable them to land a job when returning to the workforce. To pay for this, many took out student loans. A unique nuance to the number of borrowers for student loans that highlights this is that 2/3 of all student loan balances are held by borrowers over 20 (5). In general, a large factor of student loan growth can be attributed to an increased demand for a college education. Between 2005 and 2010 college enrollment grew by 20% (faster than any period since the 1970’s) and between 2004 and 2014 the number of borrowers increased by 89% (5).

    Another factor that is contributing to increased delinquencies and student debt outstanding is questionable loan servicing practices. Student loan servicing companies are not acting in the best interest of the borrowers and as a result prolonging and increasing their debt burdens. An example of this is that many borrowers are eligible for income based repayment plans that would cap payments based on their income and family size but very few servicing companies are communicating these options with the borrowers. The “Government Accountability Office estimated that 51 percent of student loan borrowers nationwide are eligible for income-based repayment plans, but only 15 percent are enrolled” (6). Ensuring that servicing companies are acting in the best interest of the borrower through increased regulation and oversight will ease debt burdens and decrease delinquency rates.

    A key difference in student loans compared to other loans is the difficulty in erasing/extinguishing these debts. A lawyer representing the Department of Education stated that “No student debtor should get a break on student loans unless they can show a “certainty of hopelessness, [A] debtor must specifically prove a total incapacity in the future to repay the debt for reasons not within his control,” (7). The fact that this type of debt follows the borrower throughout his/her life creates a significant drag on that individual’s ability to make large purchases or invest in their future. This has been cited as the most prominent reason holding backing household formation (8) which in turn has stunted economic growth.

    The “student debt problem” is not only an issue for recent grads and student borrowers, but it is a worrisome trend that will weigh on future economic growth. Regulating servicing companies to ensure they act in the best interest of the borrower and making student loans easier to discharge will free up consumers to invest in their future which will ultimately prove to be a benefit to the economy.

    Sources:
    1. https://research.stlouisfed.org/fred2/series/HDTGPDUSQ163N
    2. http://www.newyorkfed.org/newsevents/news/research/2015/rp150813.html
    3. https://research.stlouisfed.org/fred2/series/PSAVERT
    4. http://www.federalreserve.gov/releases/housedebt/
    5. http://www.newyorkfed.org/newsevents/mediaadvisory/2015/Student-Loan-Press-Briefing-Presentation.pdf
    6. http://www.nytimes.com/2015/10/11/business/a-student-loan-system-stacked-against-the-borrower.html?_r=0
    7. http://www.bloomberg.com/news/articles/2015-10-14/obama-administration-hits-back-at-student-debtors-seeking-relief
    8. http://blogs.wsj.com/economics/2015/02/04/yes-more-young-adults-are-living-with-their-parents-and-its-probably-because-of-student-debt/

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