Friday, March 1, 2013

A Different Debt Bomb?

In its Quarterly Report on Household Debt and Credit, the New York Federal Reserve noted that outstanding consumer debt increased slightly, breaking the downtrend in place from the peak in 2008. 



Understandably so, most focused on the mortgage market. The foreclosure pipeline, so crucial to a revitalized housing market, although still large and far above 2006 levels has continued to shrink.  While there is still a long way to go, this measure continues to head in the right direction.



Away from mortgage debt however, there is one portion of debt that never saw a decline and continues to grow:  Student Loans.


While still dwarfed by the over $8 trillion of mortgage debt, student loans, at nearly $1 trillion, now constitute the second largest balance of household debt.  Given the historical value assigned to a college education, and higher compensation associated with it, this would not be quite so worrisome were it not for the change in the delinquency rate over the same time frame.



Approximately 35% of those borrowers under the age of 30 and in the process of repayment are over 90 days delinquent.  This is up significantly from the low 20% range just 8 years ago.  With the large increase in the unemployment rate among 20 - 24 year olds from 7.2% to a peak of 17.2%  during the Great Recession and currently at 14.2%, the delinquency rate may not be improving anytime soon.


Source: Bureau of Labor Statistics

Also, keep in mind that unlike most other debt, student loans are generally not disposable in bankruptcy court. That debt will therefore be a drag on the household formation and spending patterns of this generation for a long time.  Something to keep in mind when looking at stocks that would normally benefit from those trends.

No comments:

Post a Comment