New York Fed Report on Debt

It’s good that the New York Fed releases its quarterly report on debt in the US before most college acceptance and financial aid award letters go out. Why? Because it gives us a chance to look at what is going on in the world of student loan debt and help our students avoid joining the lost world of young adults with excessive debt.

This quarter’s report shows that household debt is approaching its peak reached in the third quarter of 2008—and we know what happened next then. However, this time around the composition of debt is quite different. In fact, the report shows that while all categories of debt increased in the fourth quarter of 2016, two sectors led that increase: student loans and auto loans.

The report also showed that over 11% of student loans are “seriously delinquent,” which it defines as more than 90 days delinquent. Analysis has consistently shown that the “seriously delinquent” segment tends to understate the inability to repay loans because approximately twice the balance that is seriously delinquent is in deferment or forbearance, often due to financial hardship.

Increases in mortgage and auto loans are generally considered signs of positive economic conditions; indeed, the report shows that overall delinquency rates held stable while debt increased, and are considerably lower than in 2008.

The good news on the student debt front: Total student debt only increased by 6.3% in 2016, the lowest annual increase since 2003.