The Young and The Riskless: Household Debt Jumps, Student Loans Jump Higher
NEW YORK ( MainStreet) The New York Fed released its Household Debt and Credit Report for 4Q 2013 on Monday. Among the results: aggregate consumer debt increased by $241 billion in the fourth quarter, the largest quarter-to-quarter increase since 2007. More importantly, the report said, between 4Q 2012 and 4Q 2013, total household debt rose $180 billion, marking the first four-quarter increase in outstanding debt since 2008.
But consumer spending has a long way to go before it returns to pre-crisis levelsexcept for auto loans and student loans.
"A couple of things stand out," the Fed said in its report, which was written jointly by Andrew Haughwout, Donghoon Lee, Wilbert van der Klaauw and David Yun. "First, overall growth in debt remains considerably more muted in 2013 than it was in 2006, with the exception of auto loans, where 2013 data continued to reflect the strong growth we have been seeing since mid-2011, and student loans."
"In the case of student loans," the report continued, "the percentage growth has moderated since 2006, but since the outstanding balance has doubled, the lower percentage growth is associated with comparable dollar increases. Mortgage and home equity line of credit (HELOC) balances, in particular, grew much more slowly in 2013 than in 2006. Second, for all loan types and in both years, balance increases were mainly driven by younger age groups."
Again, the Fed found student loans are an exception: even older student loan borrowers continue to increase their borrowing.
"There's been a tremendous amount of attention to the growth of student loans in recent years," the report said. "First, student loans grew the most of any debt product in both periods in percentage terms. Second, the growth in educational debt, like that of auto loans, is concentrated among the lower and middle credit score groups."
The Fed has placed a lot of emphasis on credit scores when it comes to predicting outcomes. Mark Kantrowitz, vice president and publisher of Law Vegas-based Edvisors Network, believes that credit scores have limited value when it comes to forecasting when these loans will be paid off--and their true value is in the payoff.
"Credit scores are predictive of whether a student will complete their education but not of the student's income after graduation, nor delinquency or default," Kantrowitz says.
The name of the college, the degree level, the degree program and GPA are more important. He adds, "Many private student loans use some or all of these criteria to help inform their credit underwriting decisions, not just credit scores."
Underwriting standards have changedand become tighteron private loans.
"Most private lenders will not lend to students enrolled at colleges that have a federal loan default rate over 10%," Kantrowitz says. "Some target only the most elite colleges. Some have models that are quite sophisticated and predict income after graduation. Some consider the year in school, since a college senior is more likely to graduate than a college freshman."