Student Loan Debt Clock Reaches $1 Trillion
Mark Kantrowitz / Publisher of Fastweb and FinAid
The student loan debt clock reached the $1 trillion milestone at about 6:40 am ET on Tuesday, May 8, 2012.
Although the student loan debt clock is for entertainment purposes only, reaching this milestone demonstrates that student loan debt is a macroeconomic factor, with the potential to affect the economy, albeit modestly at present. Student loan debt will not derail the economy the way mortgage debt did, because student loan debt outstanding is about a tenth the size of the mortgage marketplace. Total annual student loan payments are only about 0.4% of GDP. But students who borrow too much have a tendency to delay lifecycle events, such as getting married, having children, buying a car, buying a home, saving for their children’s college education and saving for retirement. As the amount of debt and interest rates increase, a greater percentage of family income must be devoted to repaying student loans instead of other priorities.
Accordingly, there is a clear need for better tracking of total student loan debt outstanding and better analysis of the impact. For example, there is a lack of agreement on just how much student loan debt is outstanding.
• The Federal Reserve’s G.19 report lists $453.3 billion in education debt as of February 2012. This figure reports just federal loans held by the federal government. It does not include federal loans held by private lenders nor does it include private student loans.
• The Consumer Financial Protection Bureau (CFPB) reported on March 21, 2012 that total student loan debt outstanding exceeded $1 trillion in late 2011. The CFPB figures, which are based on a survey of education lenders, include capitalized interest, while the student loan debt clock does not. The student loan debt clock bases total federal student loan debt outstanding on figures from the federal budget, which does not include capitalized interest. The student loan debt clock bases total private student loan debt outstanding on a repayment trajectory model, which does include capitalized interest. Student loans are unique among forms of consumer debt in that most students defer repaying the loans while they are still in school. If the borrower does not pay the interest as it accrues, it is capitalized (added to the loan balance), usually once when the loan enters repayment.
• The Federal Reserve Bank of New York (FRBNY) estimated in the quarterly Household Credit report that total education debt outstanding reached $867 billion in Q4 of 2011. The FRBNY figures are based on a statistical sample of Equifax credit report data. Although Equifax has corrected errors in the classification of student loan debt, there may still be issues with the aging of the consumer panel that was used to sample the Equifax data. Even a slight shift in the age distribution of the panel toward older consumers may be enough to overlook about $100 billion in recently disbursed student loan debt.
The nature of student loan debt is sufficiently different than other forms of consumer credit that it should be tracked separately.
It is unclear how one should celebrate the $1 trillion milestone. Somehow, greeting one another with “Happy Student Debt Day” doesn’t seem appropriate.
Perhaps this occasion should be marked by a review of several tips on ways to minimize student loan debt.