By the end of 2016 consumers held over 12.6 trillion dollars in household debt, tapping on the door to the all-time high of 12.9 trillion dollars, reached in late October 2008, just before the Great Recession. The recession brought on massive loan defaults leading to financial write-offs by banks and lending institutions. As a result of the high level of charge-offs and increased regulation aimed at preventing another crisis, banks tightened lending requirements, turning away even highly qualified applicants. After falling sharply in 2008, consumer debt balances began steadily rising for the last three and a half years. With lending policies loosening and unemployment rates remaining low, available money is rising quickly.
The New York Fed Consumer Credit Panel (CCP)recently outlined a clearer picture of consumer borrowing habits and highlighted important shifts. The new direction of household debt moved away from home loans to auto and student loans. At the close of 2016, loans associated with homes, such as first and second mortgages and equity lines of credit, remained below 2008 levels at nearly 1 trillion dollars in outstanding debt. Between 2006 and 2016, vehicle loans increased by 367 billion dollars and student loans rose by 671 billion.
The New Look of Today’s Borrower
In addition to a different makeup of consumer household debt, lenders continue to favor higher credit quality applicants, shifting the age and attributes of the average borrower. For example, in 2006, home buyers maintained a median credit score of around 700, whereas, in 2016, the median score rose to 760 for approved home loans.
In 2008, when debt balances reached the highest level, seniors age 60 and over held 15.9% of total consumer debt. By the end of 2016, the 60 and above age bracket held 22.5% of the total household debt. Instead of paying off their homes, and entering retirement free from debt, today’s seniors are taking on more debt in the form of auto and student loans. Individuals under 50, over the same time-frame, took on less debt, partially due to tighter lending requirements and buying homes later in their careers.
Older borrowers increase the overall credit quality of loan portfolios, due to increased stability and longer borrowing histories. Banks enjoy lower risk as they target older, more established borrowers. Seniors are taking out student loans to pay for the educational needs of children and grandchildren and co-signing or purchasing vehicles for the benefit of family members. From 2008 to 2016, consumers with credit scores of 760 or above grew debt balances by over 878 billion dollars.
Consumers with poor credit have experienced limited access to lending, with balances falling by 752 billion dollars since the recession began in 2008. Limited borrowing options available to those with credit challenges leads to higher interest rates and more reliance on Payday and title loans, which plague those shut out from traditional lending channels.
Increases in debt balances of seniors put their standard of living in retirement at risk. Borrowers over 60 are the fastest growing age group for student loan debt, but also face the highest rate of default, topping 40%.
New Lending Standards Change Home Ownership Overall
Falling mortgage balances are partly due to consumers remaining in homes longer and paying down debt balances, without refinancing or receiving cash from equity depleted homes and partly due to stricter lending standards. Millennials are more likely to live with family members and prefer renting for its mobility and flexibility to follow the job opportunities.
Rising home prices and low inventory reduce affordable homes available for working class Americans, adding to the low home ownership numbers among Millennials. High student loan balances reduce buying power because it increases debt banks consider when determining maximum loan amounts..
College graduates continue to fare better than those without additional schooling, over the long term, even when considering student loan debt. Although those graduating with higher levels of student loan debt tend to purchase homes at an older age. Lifetime wage projections point to nearly double career income levels for those completing a bachelor’s degree, despite the slow start compared to previous generations.
Trends in Borrowing for College
Total student loan debt balances increased by a staggering 170% over the last decade to reach 1.31 trillion dollars at the end of 2016. Students also repay the debt at a slower pace, impacting personal finances and the economy as a whole.
Graduates completing advanced degrees hold a larger percentage of the debt, even with their smaller numbers, which can skew the statistics to the high end. For example, those completing doctorate degrees could easily have $100,000 or more in loan balances, but the higher incomes they achieve lower default rates among these borrowers. Only 5% of students’ complete graduate studies with over $100,000 in debt, but make up for 30% of total student loan debt balances. Bachelor degree students typically carry lower than the average balance reflected in most calculations. For example, 65% of graduates completing a bachelor’s program have debt levels below $25,000, yet the overall average student loan balance for all graduates is $37,172. These statistics only consider federal loans for schooling at public and non-profit schools. It does not consider those leaving school before completing their degree, private loans, or debt incurred from for-profit schools.
Today’s college graduates face new challenges to meet traditional milestones, which include buying a home. It is more difficult to save for a down payment, and achieve the financial stability necessary to purchase homes in the rising real estate market found in most communities.
Millennials faced the decision to incur more debt to improve long-term job prospects or find adequate alternatives to building financial security. For most, that does not immediately include owning a home.