No bubble to burst: U.S. student debt is not housing
August 12, 2014
Part of Vanguard's Global Macro Matters research series
Understanding the current—and potentially future—state of the global economy helps investors put market movements into context. To promote that understanding, researchers from Vanguard's Investment Strategy Group examine the economic trends that impact the investing environment in this new series. Below is the second of their insights into Global Macro Matters. Download a copy.
U.S. student loan debt now exceeds $1 trillion
In an environment of broader U.S. consumer deleveraging, student debt is the only form of consumer debt that has risen since 2007, having doubled since the recession.
Both the number of borrowers and average debt balances of student loans have increased more than 70% since 2004 (source: Federal Reserve Bank of New York). Factors in this rapid increase include higher tuition costs, the deep recession, and overall demand for higher education.
Student loan debt has doubled since the recession
Note: Growth of debt levels indexed to 1 in December 31, 2007.
Sources: Vanguard, based on data from Federal Reserve Bank of New York.
Macro view: Student debt growth too small to repeat debt crisis like that of 2007–2009
Size matters. At 7% of U.S. gross domestic product, student debt outstanding is a fraction of the size of mortgage debt to GDP, which peaked in 2007 at 62%.
Student loan debt lacks the financial interconnectedness of some types of mortgage debt, too. For instance, total student loan asset backed securities (ABS) represent less than 2.5% of total mortgage-backed securities (MBS) in 2007. Also, student loans are recourse loans, meaning borrowers can't "walk away" from the payment obligation.
U.S. student debt today versus mortgage debt in 2007
Notes: Mortgage "Payment to income" represents median monthly mortgage payment as percentage of median monthly income as of 2007; student debt "Payment to income" represents median monthly student debt payment as percentage of median monthly income as of 2010; "Growth rate of debt" represents five-year average growth through peak debt level; "Delinquencies" represent percentage of account holders delinquent at peak of delinquencies (2010 Q1 for mortgages; 2013 Q3 for student debt).
Sources: Vanguard calculations, based on data from U.S. Census Bureau; Federal Reserve Bank of New York; Securities Industry and Financial Markets Association; and Moody’s Analytics Data Buffet.
Micro view: Student debt matters for housing market, as does education.
According to our estimates, all else equal, student debt lowers the probability of owning a home in one's lifetime by –1.5%. The increase in student loan borrowers from 2008 to 2012 lowered U.S. housing demand by approximately 36,000 homes per year (or 3.5% of first-time home buyers) over that time.
However, this drag on the housing market should be compared with the positive housing demand associated with higher levels of education and, on average, income. Although financing a bachelor's degree with student debt decreases the likelihood of a typical 30-year-old college graduate purchasing a home by –1.7%, obtaining that degree also increases the likelihood of purchasing a home by 10.8%, relative to not attending college at all.
Homeownership rate for typical 30-year-olds with varying student debt status
Notes: Figure based on results of probit model accounting for demographics, income, level of education, and student debt. Estimates based on a 30-year-old with annual income of $55,000.
Sources: Vanguard, based on data from Federal Reserve's 2010 Survey of Consumer Finances and U.S. Census Bureau.
The return on education
Although all segments of the U.S. labor market have suffered over the past several years, American workers with higher levels of education have, on average, notably higher income levels and lower jobless rates. If anything, these differentials have widened over the past decade.
In an ever-more-competitive global economy, one could argue not only that returns on greater education and skills attainment will remain high in the future, but also that they may in fact increase over time.
U.S. student loan debt is associated with the benefits of higher educational attainment
Note: Chart is based on policy target framework proposed by Federal Reserve Bank of Chicago President Charles L. Evans (in "Like It or Not, 90 Percent of a 'Successful Fed Communications' Strategy Comes from Simply Pursuing a Goal-Oriented Monetary Policy Strategy," speech delivered to U.S. Monetary Policy Forum, New York City, February 28, 2014).
Sources: Vanguard, based on Evans (2014) and data from U.S. Bureau of Labor Statistics, Federal Reserve Bank of Philadelphia, and U.S. Congressional Budget Office.