In Part I we reviewed the impact of the “Great Recession” (which was the direct result of the 2007-09 Financial Crisis) on personal debt in the United States. Naturally, the Great Recession forced most folks in the U.S. to “retrench” and cut back on spending in order to cope with the economic damage inflicted upon the U.S. Therefore, personal debt levels dropped steeply and demand for new credit developed quite slowly.
In this article, we will take a look at what has transpired since 2009 in the area of U.S. personal debt.
If you look at Slide 1, you’ll see a listing of U.S. personal debt as of December 31, 2014.
You may or may not be surprised by the level of Student Debt – which varying sources place at the $1.1 to 1.3 Trillion level. The astounding fact is that total U.S. Student Loan Debt has tripled in the past decade!
As a result Student Loans have surpassed both credit card debt and automobile loans as the second largest source of personal debt in the U.S.
As you can see in Slide 2, only Mortgage Debt is larger than Student Debt.
The proportionate size of the various categories within U.S. Personal Debt becomes even more obvious in Slide 3 (aggregated by account rather than household). On a relative basis, Student Loan debt appears to be even larger in that slide!
This trend has become a matter of concern among many experts… and a matter of alarm for others. The fact is that higher education costs have, for many years now, been trending upward at a faster rate than inflation – prompted by a combination of factors that include competition among the best schools to “keep up” with faculty costs and university infrastructure features, and the reality that personnel costs generally account for 50% or more of total cost for schools.
The point of particular concern/alarm in this area is the trend in delinquencies. The following comes from a recent report by the New York Federal Reserve Bank:
“While overall delinquency rates were unchanged at 4.3 percent in the fourth quarter, delinquency rates for auto loans and student loans worsened. Our Liberty Street Economics blog post provides a further discussion of the delinquency picture:
“’Although we’ve seen an overall improvement in delinquency rates since the Great Recession, the increasing trend in student loan balances and delinquencies is concerning. Student loan delinquencies and repayment problems appear to be reducing borrowers’ ability to form their own households.’”
Illustrating the reasons for the concern expressed by the New York FED are Slides 4 and 5, which demonstrate through graphs the faster trend in the growth of both Student Debt and Student Debt Delinquencies (90 days or more) .
Some commentators, whether from genuine economic reality or from a desire to garner more “eyes” on their articles regarding Student Debt levels, have lately been bannering their articles with headlines such as: “The Next Debt Bomb”; “New Financial Crisis Brewing”; “Student Debt Out of Control”.
However, no matter how one looks at it, Student Debt currently stands as the fastest growing debt category in the U.S. According to the Kansas City Federal Reserve, the average student debt balance owed by those who carry one or more unpaid student loans stands at $25,745. If you combine that with the likelihood that, among those graduates who support themselves, a large proportion carry one or more credit card balances from month to month, the possibility of long-term financial sustainability in the current economic environment appears discouraging.