Consumption Choices and Student Loan Debt

The New York Fed shed some light on student loan debt numbers reported in the FBRNY consumer credit panel in a few presentations and an article at liberty street economics.

If you’ve ever seen the news you know that aggregate student debt has been increasing rapidly over the past decade, second only to mortgage debt.  Student loan debt dwarfs aggregate auto loan, credit card, and home equity debt balances, but that doesn’t tell the whole story.  While student debt per borrower is at its highest point ever, total debt per capita for student borrowers hasn’t increased relative to total debt per capita for non-student borrowers in recent years.

Until recently, borrowers with a history of student debt were more likely than their counterparts without student debt to take on home equity and auto loan debt – reflecting the high financial returns to higher education and the ability for college-educated people to participate in the housing and auto markets.  However, that trend has reversed, and a widespread decline in participation in all debt markets is prevalent among those with a history of student debt.

The article proposes a few rationales for why this is the case.  First, college grads revised their expectations about future income downward after the financial crisis and subsequently reigned in consumption.  Second, student debt borrowers may not have access to credit; debt to income ratio requirements have increased in all debt markets as a result of stricter underwriting standards, which may render student debtors ineligible to borrow.

I don’t know enough about underwriting standards to make a conjecture, but the article is worth reading as it provides the full story on an issue the media loves to turn into something it is not.


About schapshow

Math & Statistics graduate who likes gymnastics, 90s alternative music, and statistical modeling. View all posts by schapshow

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