- Oct 28, 2017
There’s some good news and bad news about the state of Americans’ finances embedded in the Federal Reserve Bank of New York’s latest Quarterly Report on Household Debt and Credit.
First, the good news: 95.6% of households were current on their debt payments as of the second quarter, whether that’s mortgages, student or automobile loans or credit card bills. That’s the largest share since the third quarter of 2006, which of course was well before the financial crisis and the start of the last recession. It’s a sign that many individuals and families are continuing to benefit from this record-long recovery and have the resources to make timely payments on what they owe.
The bad news is that the share of households deemed “severely derogatory” on payments isn’t going away like it was 13 years ago. The category, which the New York Fed defines as “any stage of delinquency paired with a repossession, foreclosure, or ‘charge off,’” is hovering at 2%, the same level it’s been at since the second quarter of 2015. As the bank’s researchers noted in a blog post, severely derogatory balances now make up almost half of all delinquencies, the largest share ever in data going back to 2003.
What’s behind this trend? The answer may not be all that surprising to those who’ve heard Bernie Sanders, Elizabeth Warren and other Democrats on the campaign trail: Student loans.
Of the roughly $250 billion severely derogatory outstanding balance, defaulted student loans make up 35%, the report found. That’s a new phenomenon: For years, student loans barely registered compared with mortgages and credit cards. But, as the researchers noted, the U.S. housing crisis is in the rear-view mirror and the foreclosure pipeline has cleared out pretty much everywhere across the country. On the other hand, defaults on student debt “have grown stunningly since 2012,” they said.
Digging a bit deeper into the New York Fed’s report, those who are transitioning into serious delinquency (90 or more days late) on their student debt payments aren’t who you might expect. Those aged 18 to 29 are actually experiencing the slowest increase in delinquency rates as of late, while older Americans are falling behind. In particular, the category of 40- to 49-year-olds has experienced a significant jump in recent quarters.
The takeaway is that student loans are a real concern to a lot of Americans. Their explosive growth seems to be holding back a swath of U.S. households during this economic expansion. Delinquent debt not only has to be paid back, which is money that could be used to purchase goods and services, but it also significantly impedes a household’s ability to access credit. That, in turn, makes it more challenging to start a business, buy a home or even get a job.