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Kelly Edmiston, Federal Reserve Bank of Kansas City, 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)
   Bryan J. Noeth, Federal Reserve Bank of St. Louis (13:53)
now playing  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.

Kelly Edmiston: All right. My name is Kelly Edmiston with the Kansas City Fed. And I’ve been working on some research with my colleague, Lynn Waston (phonetic 00:20:8) from the Federal Reserve Bank of Dallas. We’ve got a, it’s actually a very preliminary analysis of ... we’ve noticed that there’s quite a bit of variation in the average amount of debt that’s being held and in delinquency rates across states. And so, the goal of the paper is to seek out, to find out why that is the case. Why is it that in some states the average person holds less debt than in other states, or why these delinquency rates vary so much. And that’s useful for a couple reasons: one is, it’s very difficult to have any individual data that you can compile a large amount of data to do an analysis at the individual level. So, our hope is that this might at least shed a little insight about individual behavior. And then also it could help to influence policy. And the usual disclaimer applies. We’re not speaking for the Federal Reserve Bank of Kansas City or Dallas or the Federal Reserve System.

What I want to do is .. and, again, this is a very preliminary analysis. We’re ... Lynn Waston, I’m going to leave that for her to talk about, but for the most part, we’ve still got some data we need to collect, some better data and some more ... to think a little bit more about the methodology.

But before I turn it over to her, I want to give just a little bit of motivation, just a snapshot of a national analysis, and then just to show some of the variation that there is across states.

(Unintelligible 01:52:4) this is for the Federal Reserve Bank of New York. This is outstanding student loan debt. I don’t have to explain to anyone here that it’s been growing rather dramatically over the last several years. So, one of the motivating factors is the huge increases in the amount of debt that’s ... the accumulation of debt over time. The second major motivating factor is the delinquencies on student loan debts. This is the percentage of balances 90 or more days past due by loan type. If you look at the light blue line there, it’s now the highest, in terms of 90-plus day delinquencies surpassing credit cards most recently.

So, that’s the motivation. Just from a national perspective, federal student loans make up about 41 percent of all student financial aid, at least in school academic year 2012-2013. About 3.6 percent were nonfederal loans. And these are ... it could be loans from commercial banks or other financial institutions, but it also could be loans from the schools, themselves, or loans from the state. So it’s anything other than a federal loan. The federal loan would include Stafford and also Perkins.

This is per year lending, rather than the accumulation of debt that I showed you earlier. And what’s interesting here, first of all, the drop-off in the pink line in the nonfederal debt, during the financial crisis with the interest loan caps, the financial institutions found it unprofitable to make student loans, so they stopped ... a lot of them stopped doing it. In recent years there’s been a bit of a deceleration, I would say, in the amount of student loan debt that’s been issued. And there’s been an increase in unsubsidized Stafford loans, but a decrease in subsidized Stafford loans.

In terms of the outstanding student loan debt, there’s a lot of factors that come into play. One is that you don’t hear talked about very much is that it’s driven in significant part by enrollments. So, part of that, the fact that the debt’s been getting big so fast is because there’s more people going to college. And if there’s more people going to college, there’s more people borrowing money.

There has been a moderate increase in the share of people who go to college that borrow. So that’s part of a factor. And then, at least until recently, average debt per student has been increasing about 6 1/2 percent per year; that’s in nominal terms. The inflation rate’s been about 2% over that period. But in the most recent year, average student loan debt only increased at the rate of inflation, so that’s down a little bit.

Just a little bit of snapshot national figures. This is using data from the Federal Reserve Bank of New York’s Consumer Credit Panel, which is basically data from Equifax credit reports. That’s all been cleaned and sanitized, so we can’t tell who anybody is, or anything of that nature. And it’s invaluable for providing this kind of information. And we hear a lot about average amounts of debt, but very rarely do we hear anybody talk about the median amount of debt. And the median amount of debt, at least as I’ve calculated it, as we’ve calculated it, is under $14,000, which means that about half of people who owe student loan debt owe less than $14,000.

There’s a big skew, the average is so much higher than the median. I think the main reason for that is that there’s a small share of people with enormous amounts of consumer ... of student loan debt. According to the Federal Reserve Bank of New York, about 4 percent have debt over $100,000, and about .6 percent have debt over $200,000.

I looked a little bit about payments. The median payment is about $200, so half of people pay less than 200, half pay more. 25 percent of people pay under $100, but 25 percent also pay over $400 a month in a minimum payment on their student loans. And when you think about what someone just coming out of college makes, that’s a big burden. And then there’s a huge difference in ... I’m not going to report on it here, but in the delinquency rates between people who finish college and people who don’t. And I think that’s not real surprising. So, if you haven’t finished college and you’re paying $400 a month, then that’s quite burdensome.

This is a New York Fed number. Lynn Waston and I have talked about doing an age-based analysis, but we haven’t gotten to it yet. A third of the borrowers, people who hold student loan debt are actually over 40 years old, so there’s quite an age distribution that might be surprising to some.

Delinquency measures ... we can do it in a number of ways. We can say, what percentage of the loans are outstanding or delinquent? What percent of the balance is delinquent? Or what percent of the borrowers are in delinquency? So there’s a lot of ways we can do that. And then there’s two ways we can think about ... we might want to think about only people who are in repayment. Okay. And then we can look at ones with nonzero minimum monthly payments or we can look at those who have non-declining balances that are not delinquent and throw all those people out. And that would get people only in repayment. When we do that ... I’m going to skip over that. I’m going to skip over ...

Let me just briefly mention the fiscal impact. By the government’s own accounting these on accrual base method, in the year the loan is disbursed, they include the disbursement in the budget, plus the net present value of all the future stream of payments in return, and they make account for delinquency. By their own standards, they profit from the student loan program. By fair value accounting standards, it’s about .4 percent of the U.S. budget.

I wanted to point out the great variation. In Wyoming you can see that there’s about $21,000 in average student loan debt, whereas in Maryland it’s close to $30,000. And you can just see from the map there’s quite a bit of variation. I’m not going to go into detail. I need to leave Lynn Waston some time.

There’s overall student delinquency rates, the highest ones are, you know, 15, 16 percent, but these also include loans that are in forbearance or deferment. So that gives ... is a little bit of a misleading number. So what we wanted to do, we think is a better number is to look at people who are actually in repayment. And when we do that, one way is to look at those who have nonzero payments, then we have some states in red where more than 35 percent of people in repayment are delinquent on their loans. This method, too, is if we throw out all those people with non-decreasing balances and no delinquencies, and again, we get the same thing. In some of these orange and red states we have delinquencies of 30 and 40 percent, whereas on the other states the delinquency rates are as low as 13 percent. So there’s a significant, very significant amount of variation in average debt and delinquency over ... across states.

I’ll turn it over to Lynn now.