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Caroline Ratcliffe, Urban Institute, What We Know About Student Loans in the Eighth District and Nationwide

NOVEMBER 18, 2013

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   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)
   Kelly D. Edmiston, Federal Reserve Bank of Kansas City (9:17)
now playing  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.

Caroline Ratcliffe: Well, it's great to be here today to discuss my recent research with a colleague of mine at the Urban Institute, Signe-Mary McKernan on student loan debt. So who has student loan debt and who's worried about their ability to repay these student loans?

So we came at this topic from a broader asset-building perspective. From other research, we see that the younger are falling behind in terms of their wealth building, and that student loan debt is a piece of this puzzle. And as we discussed earlier, education and higher education is still a good investment for many students, particularly those who go on to complete their degree. But it's an important component on people's balance sheets. And this concern with student loan debt, it can have ripple effects. It can delay wealth building, in particular building a rainy day fund, saving for retirement, home ownership.

So before I get to answering these specific questions, I'm going to put up a slide that shows that the young are, in fact, falling behind in terms of their wealth building, and then a graph that shows student loan debt amounts and how that fits into the picture.

So when we look at the overall economy since the early 1980s, what we see is that total U.S. wealth has roughly doubled. So we've got this doubling of wealth in the economy. So let's look at how this has changed for different cohorts. So when we look at the Baby Boom and silent generations, what we see is that they have far more wealth today than people at their same age in the early 1980s. So we're looking at the change between 1983 and 2010. So, for example, the average wealth of 56 to 64-year-olds today is more than twice the wealth of 56 to 64-year-olds in 1983. That's 120 percent higher.

So what if we look at people in Generation Y and X. Well, people in Generation X and Y have not benefited in the same way from this doubling in the economy. In particular, people in their late 20s to mid-30s. That's this 29 to 37-year-old age group. Their average wealth as a group in 2010 was 21 percent lower than that of 29 to 37-year-olds back in 1983.

So if we look over time, this pattern is not just a result of the great recession. This age group, the young, did take a particularly big hit during the great recession, particularly in housing. So many young people bought their first homes in the years just prior to the great recession. They were more highly leveraged in housing, so they had a lot of debt and we see that their home equity on average fell about 60 percent. So housing equity is a big issue here. But if we look at other types of non-housing debt, what we see is that student loan debt stands out in recent years. So this slide is focusing on that group of 29 to 37-year-olds over time, and student loan debt clearly stands out, that it has increased sharply in recent years. So for 29 to 37-year-olds in 1989, student loan debt was a relatively small component of overall debt. Today it's second only to mortgage debt.

So there's a few things going on here. So, first, we've got increases in the percent of households that have student loan debt. A part of this is we see more people in school, and the amount of debt per borrower is also increasing. So this average, when we look across everyone, there's these different pieces. But even if we look at the average per borrower, the median--that some of these things are still going up, but not at the sharp rate. So it's still increasing but at a decreasing rate at the median.

And let me just reiterate that one of the issues here is that this debt can then have these effects in terms of longer term wealth building. People have asked about other types of debt, particularly credit card. You can see car loans, credit card debt, other debt. Credit card debt from younger Americans did increase prior to the great recession following overall trends in credit card debt, but it fell after. Again, it mimics overall trends.

So now what I want to do is really zero in on student loan debt and ask who has student loan debt and who's worried. Let me just briefly say we used data from the National Financial Capability Survey. This was sponsored by the FINRA Investor Education Foundation and were focused on adults 20 and older in 2012. And the survey has two questions. One is do you currently have any student loans and are you concerned you might be unable to pay off your student loans? So we don't have information on debt in this survey like we did for the prior graphs. And then there's lots of other economic and demographic characteristics that we have in this survey that we use in these analyses.

So first, who has student loan debt? One out of every five Americans aged 20 and older does, so 20 percent of the U.S. population. And I want to show you a series of slides now on who's most likely to have student loan debt.

So student loan debt is held across the education and the income spectrum, so it's not exclusive to the highly educated. Nine percent of people with no more than a high school degree have student loan debt, and this might be debt that's taken out for a non-degree certificate, by funding a child's education, for example. And when we look at people with some college or more, between 25 and 30 percent of people have debt and that includes 25 percent of people with some college. So these people could still be in school. They might have completed some type of non-degree certificate, but others may have failed to complete the degree for which they took the loan out. So we heard about that earlier today also. So that's a group of particular concern. And then when we look across income, that student loan debt is held across the income spectrum in a pretty narrow range there, between 18 and 21 percent.

So student loans are more likely held by young and minorities. The likelihood of having student loan debt drops sharply with age. 40 percent of people in their 20s have student loan debt. This drops by ten percentage points to 30 percent for people in their 30s. It drops another 11 percentage points for people in their 40s, but still almost 20 percent of people who are in their 40s are paying off student loans. And we see that African-Americans and Hispanics are about twice as likely as white students to have student loan debt. And this two-to-one ratio holds among people who have some education beyond high school as well. So that holds for this different population. And this difference is consistent with large wealth differences between white families and families of color. White families have about six times the wealth on average as families of color. So this greater family wealth translates into greater opportunity. So adults in the family can use that wealth to finance education for themselves or for their children.

Student loan debt is also more likely to be held by people with financially dependent children. We think of them as having competing expenses, so they may carry their student loan debt longer, and we've seen no differences by gender.

So now I want to move on and talk about some of the results we see of who's worried about student loan repayment. What we find here is that over half of the adults--57 percent of those with a student loan report that they're concerned they may be unable to repay that loan. So that's of the 20 percent who have student loan debt. And so this question was asked in 2012, so many of these families are likely still feeling the effects of the great recession. So this is tied up with reductions possibly in retirement savings, housing, wealth that occurred during the great recession as well as employment stability and wage declines over the time period, too. So it's wrapped up in a much bigger puzzle.

So what I'm going to do now again is show you some results on who's most worried about student loan debt. I'm going to show some results from these regression models. I'm going to show them in the same graphical way, but we're sort of looking at--we want to say controlling for household income, how do these other characteristics look? So these models include educational attainment, household income, age, race, ethnicity, number of children, living arrangement, employment status.

So repayment worry is lower for higher income and full-time workers. People in lower income households are substantially more likely to have concern about their ability to repay student loans. So what's the magnitude here? So compared with people in households with incomes over $100,000 people in households with income below $25,000 are 86 percent more likely to worry about repaying their student loans. The concern is nearly as great for the next income group, those people with incomes between $25,000 and $50,000. They are 72 percent more likely to worry about repayment. And people who are employed--going down to the next set of bars--people who are not employed full-time are more worried. And, again, this is even controlling for a household income. So compared with those people who are employed full-time, people who are employed part-time or are self-employed are about 30 percent more likely to be concerned about repaying student loans.

People with college degrees are less worried about repayment. So people with some college and people with graduate degrees are more likely to be concerned about repayment than people with college degrees. So people with some college, for example, that would include people who did not complete the degree, that first they took the loan out. It might include people who received a non-degree certificate that's not as valuable as they thought it might be. So this might lead to higher concerns about repayment. And then people with graduate degrees--they could have loans from both college and from graduate school, increasing their repayment concern. People with financially dependent children, the second set of bars there, are more likely to be concerned about student loan repayment, likely because of competing needs and expenses. And then finally here, we see that women are more likely to worry about repaying student loans, even though they're not more likely than men to have student loans. Again, this is controlling per household income, employment status. It's not exactly clear why we're finding this, and we don't have an amount of student loan debt here. But this result is consistent with research that finds that women are less confident than men about their ability to reach their financial goals. Also, women are more likely than men to pay family bills, so they may be more aware of the monthly student loan payment, what bills are due and how student loans impact family finances.

So just in summary, student loan debt is an important component on the balance sheets of many Americans. 20 percent of U.S. adults and 35 percent of adults in their 20s and 30s have student loan debt, and over half of people with student loan debt are worried that they may be unable to repay that debt. And we heard a little bit earlier about income-based repayment, that not a lot of people are signing up for this income-based repayment. They're not getting into these programs, but that could be one program moving forward that if we get students enrolled in this, that it really could ease concerns about repayment of their student loans. And just the goal here, that we want to help young Americans take advantage of student loans to complete their degree but avoid overburdening themselves in student loan debt that will hinder their future wealth accumulation. And we talked a little bit about what students can do, but students should be also thinking about what type of school they're attending, the likelihood of completing the degree, the type of loan that they're going to take out, potential earnings in their field of study, for example.

So thank you. And if you're interested in additional information at the Urban Institute, we have our Changing Wealth of Americans website, where we have this and lots of other information. Thank you.