Tuesday, February 24, 2015

Slow Payback of Student Loans

In the fourth quarter of 2014, the outstanding balance on student loans in the United States reached a mind boggling $1.2 trillion, up from $346 billion ten years ago. The number of borrowers with outstanding loans grew 92 percent during those years to 43 million.

One reason for the enormous growth in student loans is the disturbingly slow rate at which the loans are being paid back, according to an analysis by the Federal Reserve Bank of New York. Looking at Equifax data, the researchers find only 37 percent of borrowers making regular payments on schedule. The others are either delinquent, in deferral, or still in school.

The researchers analyzed how much debt borrowers had in the year they left school and how much debt remained at the end of 2014. The 2010 cohort, for example, had $78 billion in debt upon leaving school and more than four years later still owes 91 percent of that amount. The 2005 cohort still owes 62 percent of its student loan balance from nearly 10 years ago.

The housing market is haunted by these student loans, according to the Fed analysis. "We don't fully understand how the burden of large amounts of debt on households' balance sheets for long periods of time affects student borrowers' behavior," conclude the researchers, "but our research so far suggests that growing student debt has contributed to the recent decline in the homeownership rate and to the sharp increase in parental co-residence among millennials."

Source: Federal Reserve Bank of New York, Liberty Street Economics, Payback Time? Measuring Progress on Student Debt Repayment

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