Good News on Consumer Debt, Bad New on Student Loans
NEW YORK (MainStreet) Americans stepped up consumer borrowing in the third quarter of 2013, the first increase since the end of last year. According to a report from the Federal Reserve Bank of New York yesterday, the $127 billion spike in borrowing was the biggest in five years while pre-financial crisis debt was being retired.
"This quarter, we observed an increase of household balances across essentially all types of debt," said Donghoon Lee, senior research economist at the New York Fed. "With non-housing debt consistently increasing and the factors pushing down mortgage balances waning, it appears that households have crossed a turning point in the deleveraging cycle."
Unless you count student loans.
They were included in the report, and the New York Fed noted that these borrowers as a group are taking on new student debt while falling behind in their payments. Student loans that are 90 days overdue or more jumped to 11.8% from 10.9%, while late payments on other consumer debts dropped.
Deleveraging, according to the Fed report, describes a trend where consumers reduce the debt accumulated before the 2008 financial crisis, when there was a borrowing land rush. Meanwhile a separate, outlier crisis has been building in student loans, where balances are increasing while loans that are decades old are not being paid off.
Outstanding student loans have gone up every quarter since 2003, the first year the Fed started watching these numbers. Federal student loans are worth over $1 trillion. Even if more Americans are staying current on mortgages, autos and plastic, the sheer size to the student loan market has many observers worried about its impact on the larger economy. The Fed's numbers say that student loans accounted for 3% of consumer debt a decade ago. That figure is now 9%.
While an increase in borrowing in other credit markets may be a sign of consumer confidence, a spike in student loans in the current climate resists an easy interpretation, and may also represent a spike in desperation by the borrowers that it hard to quantify.
A telltale sign that the economy continues to be weak is that a significant number of people have decided to hang out in school rather than conduct what they believe will be a fruitless job search. Those people invariably have to borrow money and that piper will have to be paid whether the job market is good or bad. Today's 20-somethings have no doubt heard about their Boomer relatives who will be paying off grad school student loans until they are in their 70s.
Unlike mortgages, credit cards and auto loans, student loans are difficult, if not impossible, to discharge during a bankruptcy filing, thanks to 2005 changes to U.S. bankruptcy laws.
--Written by John Sandman for MainStreet