Auto and Student Loans Grow at an Alarming Rate.
This year, total household debt — including housing, auto loans and student-loan debt — in the U.S. also surpassed the 2008 peak. While the debt level is similar to 2008, the things Americans are buying on credit have changed, as household incomes have increased in recent years, and housing prices and stock prices have improved.
Compared with 2008, fewer borrowers have housing-related debt and, instead, more have taken on auto and student loans.This is backed up by previous research: Student loans have made it harder for younger consumers to buy homes; plus, lower housing prices are also tied to higher student loan default rates.)
The New York Federal Reserve’s report also showed debt delinquencies of 90 days or more have mostly improved since 2008, except for student loans. About 10% of student loan balances are 90 days or more delinquent, according to the New York Federal Reserve’s analysis.
Here’s how the numbers stack up for indebted Americans in 2017: Housing-related debt is down nearly $1 trillion since the 2008 peak, but auto loan balances are $367 billion higher, and student loans are a whopping $671 billion higher, according to the Federal Reserve.
Nearly a quarter of the adults the Fed surveyed in 2016 said they or their spouse purchased or leased a new or used car or truck in the last year. About two-thirds of them took out a loan to do so. And 12% of those who used loans had a longer repayment period than the amount of time they even planned to own the vehicle.
Another trend: Older Americans are taking on a greater share of debt than in years past. Those ages 60 and older held 22.5% of total household debt in the fourth quarter of 2016, compared with 15.9% in 2008 and 12.6% in 2003. Although much of that debt is likely due to mortgages, it’s also possible they are shouldering more student loan debt than in the past, for their children and grandchildren. There were nearly 2 million borrowers between the ages of 50 and 64 who took on “Parent PLUS” loans, the loans the government offers parents, in 2015, up from about 1 million in 2005. Another 200,000 borrowers over the age of 65 also have them.
Credit card debt and auto loan debt balances for people ages 60 and older have also risen since 2008, whereas credit card debt for those 59 and younger has fallen. The Fed, when describing that phenomenon, said lending standards have tightened since the recession, and those who are older may also be more creditworthy.
Although that may make young Americans breathe a sigh of relief, it’s still potentially dangerous, as high levels of debt could mean older Americans don’t have enough money saved for retirement. Indeed, the average American couple has only $5,000 saved for retirement, and only a third of working Americans are saving money in an employer-sponsored or tax-deferred retirement account.
The Fed did find some good news, though. Largely because of tougher underwriting standards for mortgages, the Americans holding debt have higher credit scores than in the past. As of 2016, 41.3% of Americans’ total debt is held by people with high credit scores, above 760. That’s compared with 33.9% in 2008 and 23.7% in 2003. And a smaller share is held by those with lower scores, below 620. Some 13.2% of debt in the fourth quarter of 2016 was held by those with scores below 620, compared with 19% in 2008 and 16.6% in 2003. (Auto loans still have “looser standards,” the Fed found.)
Lending to people who are unlikely to pay debts back can have disastrous effects, from keeping families in debt for years to ruining their credit scores, which makes it more difficult for them to borrow responsibly in the future.