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Bryan Noeth, Federal Reserve Bank of St. Louis, What We Know About Student Loans in the Eighth District and Nationwide

NOVEMBER 18, 2013

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view the conference agenda and presentation slides »

   Julie Stackhouse, Federal Reserve Bank of St. Louis (4:20)

   Rohit Chopra, Consumer Financial Protection Bureau (30:08)
   Keynote Q&A (8:06)
   Interview with Rohit Chopra (6:40)

Resources for Managing Student Loans
   Introductions (2:12)
   Paul Combe, American Student Assistance (7:02)
   Interview with Paul Combe (12:58)
   Vicki Jacobson, Center for Excellence in Financial Counseling (5:46)
   Marilyn Landrum, Missouri Department of Higher Education (3:58)

Resources for Economics and Personal Finance
   Mary C. Suiter, Federal Reserve Bank of St. Louis (3:10)

Research Panel:
What We Know About Student Loans in the Eighth District and Nationwide
   MODERATOR: William R. Emmons, Federal Reserve Bank of St. Louis (4:14)
now playing  Bryan J. Noeth, Federal Reserve Bank of St. Louis (13:53)
   Kelly D. Edmiston, Federal Reserve Bank of Kansas City (9:17)
   Caroline Ratcliffe, Urban Institute (14:22)
   Research Panel Discussion (35:46)

The Future of Student Loans and Financing Higher Education
   MODERATOR: Ray Boshara, Federal Reserve Bank of St. Louis (7:32)
   Sandy Baum, Urban Institute and George Washington University (11:06)
   Interview with Sandy Baum (7:23)
   William Elliott III, University of Kansas (13:12)
   Jen Mishory, Young Invincibles (8:37)
   Interview with Jen Mishory (8:01)
   Gary A. Ransdell, Western Kentucky University (11:35)
   Roundtable Discussion (40:21)


Below is a full transcript of this video presentation. It has not been edited or reviewed for accuracy or readability.

Bryan Noeth: Good afternoon. I'm Bryan Noeth with the St. Louis Fed. I work for the Center for Household Financial Stability and today I'm going to talk to you about student debt locally. I know there's a lot of people in this room that are kind of from the region so I think it's good to know what's going on around here in student debt. So it's student debt in the Eighth District. Let me first say that these are my opinions, not those of the St. Louis Fed. Just a concerned citizen here. And for all those that don't know the Eighth District, early 1900s zoning, that is the Eighth District. It comprises seven states throughout the Midwest. I'll be talking about the states as a whole so I'm not just taking into account half of Missouri.

So what is the motivation here? Student debt locally around here, like nationally, has been increasing. Well why is this? What are the factors that are driving these increases? And kind of what you can do is take a look, see how enrollment has changed, see how tuition, see how aid has changed at the state level. And you can kind of see what's going on with student debt. So that's my motivation, to see at a more granular level than the national, what is going on?

And so obviously Kelly showed the U.S. numbers. These are the aggregate balances in the Eighth District states. So you can see that this isn't localized. This is across the district, across the nation student loan balances are going up. And so each one of those numbers there is actually the percentage increase since 2005. This is using the same data set that they're using. It's the Federal Reserve Bank of New York Credit Panel. It's essentially clean credit reports, data provided by Equifax. And so a lot of people see this and find this troubling.

So let's get a little bit deeper. What's kind of a simplistic explanation? Well in my opinion overly simplistic. Debt can be increasing in two ways. You can have more people with debt, what you would think of as economists would call the extensive margin, or you can have debt per borrower increasing, so the intensive margin. So things affecting the number of people with debt, you can kind of tie that to enrollment. Debt per borrower going up: tuition and aid both have effects. Tuition will obviously drive up debt per borrower but aid kind of attenuates that so those are the things that will affect debt per borrower. This is kind of overly simplistic. There are so many other things that will go into debt per capita or rising debt levels. So a host of other factors affect both margins and I'll get into a little bit what's going on there.

So enrollment: What's going on here? Well I broke it down into kind of four big things. One is you have an increase in the college-age population. More people now are of college-age population. So this is census data going back to 1980. And what we can see is during the '90s you actually had a decrease in the number of people that were college age and it came up pretty drastically post 2000. And the census projects with current birth rates and current people under certain ages that this will actually decrease going forward. You're not going to see this massive trend in population increasing of college-age people, at least out till 2040.

So what else is going on? You're also seeing rise of nontraditional students. You're seeing a little bit of a difference in the way the college composition is. And this is the change in composition of enrollment since 2000, from 2000 to 2012. And I think the main point of this it's very difficult to talk about increases in student debt without talking about increases in for-profit institutions. They generally have lower graduation rates, higher levels of debt, higher delinquency rates. And now you can see that they're actually taking up a much larger percentage of the aggregate enrollment.

So what else is occurring? I don't have a graph for this but there's a lot of evidence towards the fact that the college wage premium is increasing. So I think Rohit actually defined that before. It's just the differential of somebody that's gone to college and somebody that's not gone to college, taking into account the cost of attending-college tuition and the four years of lost earnings that they would have earned. So there's evidence—and I have this in the appendix if anybody doesn't believe me—that this college wage premium has gone up.

And I think this last piece is a little bit anecdotal but a college is almost a necessity for a lot of jobs now. If you go online and you try and apply for a job, jobs that maybe 30 or 40 years ago didn't require a college degree, it's required now. So that's a little anecdotal. I don't have evidence for that but I suggest some of that's going on.

So what does that mean for the Eighth District? So here's enrollment by state. Since 2000—I actually forgot to put in 2000-and this is for all types of institutions and what you can see is obviously the level of enrollment has gone up pretty drastically. I mean almost 40 percent in the U.S. overall. Arkansas and Kentucky and Indiana have very high increases in enrollment. In Arkansas it's actually due to their public four-years. Indiana, they actually now have the biggest two-year community college system in the U.S. And then conversely Illinois, which due to a few factors, tuition and demographics, you haven't seen the large increases in enrollment.

Okay, so what else is going on? So we kind of covered the enrollment. What's going on with tuition? So this is the average inflation-adjusted so if you take into account inflation what's the real increase in tuition since 1983? And you can see tuition has gone up a lot since 1983. For two-year community colleges and four-year private schools it's gone up about 150 percent. For publics it's gone up close to 350 percent, and a lot of that increase is recent. Now there are differentials in the costs of these. This is all indexed to 1983 but it's clear that tuition is increasing. So at the local level you're seeing that actually Missouri in public four-year had lower increases than the others and Illinois is kind of way above. We'll see in a minute that Illinois is kind of special. They have kind of cut aid to higher education. They had a higher tuition rate to begin with.

Here's the same graph but now this is for private four-years. Similar numbers. You've seen large increases in tuition across the board between 2005 and 2012 is the timeframe here. But attenuating some of this is actually aid has been increasing so the actual amount that—I think what most private institutions would say, well tuition isn't a good gauge of exactly what's going on because aid plays a big component. You can see that aid per full-time equivalent—this is established from the college board—has gone up but it hasn't been enough to offset the increases in tuition and some of the other things going on.

So what are the drivers of this? What is causing this? One is states have especially in the post crisis, post-recession time period, have cut state funding to higher education. I think that's probably one of the bigger drivers here. Other people, and I actually don't have information on this, but some people will say that colleges now compete more on amenities. And so that's driving up operational costs and salaries to do that. I can't speak for that. It's just something that other people have pointed to. Clearly increasing demand for college will drive up tuition so the fact that it's almost a necessity now, that has a demand effect. I think if you look at a longer term the actual availability of student loans that maybe in past generations weren't there is here now.

So here is a graph for state support and I know you're probably saying well Illinois looks great. But one of the issues is that they have an under-funded pension system so most of this is actually going to that. So what else affects it? What other things kind of affect debt balances? So one of the things is, which has kind of been brought up a few times but if people aren't making payments on previous vintages of loans then that will have the effect of driving up loan balances. So current job market conditions especially for the young have pretty significant effects on people's ability to make repayments. Also as mentioned before there's a changing landscape for higher education, public, private, for-profit. If that changes it will change kind of the dynamics of debt. Access to alternative forms of credit: home equity lines of credit, credit card debt, parents that might have lost their job, those are a little bit more difficult so people were having to stretch a little bit. And there are clearly many other factors. But I think these are a few of the important ones.

So what does this all mean? So you have student debt levels rapidly increasing. You have more enrollees, higher percentage of enrollees having to take on debt, borrowers taking on—not only are more people taking on debt but they're taking on higher levels of debt, and previous vintages are not being paid back on time.

So what is the increase? So this is the Equifax data basically by state. So this is the average balance of borrowers based on if you have a student debt, and this is the change from the first quarter of 2005 to the first quarter of 2013. So you can see that these are clearly very large increases in student debt. Here are the medians again and I think Kelly made this point that there's a heavy skew in this data. Most people do not have six figures of student debt but there are some people out there.

And so this was the graph that Bill was kind of excited about. This is the distribution of balances in the Eighth District. Each one of those bars represents essentially, the data is partitioned into I think like 1,200 and each one of those bars represents the percentage of people that have that amount of debt. And mainly the point here is that you can see a shift outward, a slight shift outward in the distribution of debt levels that individuals are seeing. And you can see it's only about four percent that have above $100,000 in loans as of Q1, 2013. So I think this point's been made a few times that it's actually more of a repayment crisis.

So this next graph I think is really kind of the takeaway. And this is all Eighth District states. This is all local. You're seeing a lot more people now making zero payments. So it's the same graph just for payments. And so what you see is that a much higher percentage of people are not making payments. Now this could be driven by a few factors. It could be maybe just more people are in school so a higher percentage are zero. But I suspect that a large portion is labor market conditions for the young.

And so what does this mean? Higher delinquency rates across the district. I don't have a good story of why there's a discrepancy between the states but I know Kelly and Wenhua are working hard on it so they'll be able to tell you what is driving these differentials. But I think the key takeaway is that delinquencies are on the rise across the district.

And I should put in plug for a recent that article that we had written for The Regional Economist. It's Student Loan Debt in the Eighth District: Reasons Behind the Recent Increase. You can read more at our website and I should note that this is joint work that was done with Charles Gascon in our research department. So thank you.