Student Debt Swells, Federal Loans Now Top a Trillion
Rohit Chopra is the CFPB’s Student Loan Ombudsman. This post is excerpted from prepared remarks before a conference hosted by the Center for American Progress on July 17, 2013, in Washington, DC.
While there has been considerable attention by policymakers on federal student loan interest rates taken out for the 2013-2014 academic year, outstanding student loan debt owed by existing borrowers continues to swell. The Consumer Financial Protection Bureau estimates that outstanding debt is approaching $1.2 trillion as of May 2013. We also estimate that student loans guaranteed or held by the federal government have now crossed the $1 trillion mark.
Last year, the Bureau released findings based on our research on the student loan market, revealing that total outstanding student loans were approximately $1 trillion as of the end of 2011. The 20% growth in student loan debt from the end of 2011 to May 2013 has been much faster than growth in revolving credit products (predominantly credit cards), which increased from $843 billion to $857 billion – an increase of less than 2%. Student loans now comprise the second largest form of consumer debt behind home mortgages.
The Bureau’s methodology to estimate the total amount of outstanding debt relies on separately sizing the federal and private student loan markets.
Federal student loans: Federal student loans were either originated directly by the Department of Education (55%) or by other institutions, largely comprised of banks (45%). For estimates of federal student loans, the Bureau relies on the Department of Education’s federal student aid data. As of March 2013, these data indicate that there was $999 billion outstanding.
As of 2010, federal student loans are originated by the Department of Education through the Direct Loan program or by schools through the Perkins Loan program.
Based on the recent pace of origination, as well as the monthly estimates of outstanding consumer credit, the Bureau estimates that there was approximately $1.01 trillion outstanding as of May 2013.
Private student loans: Last year, the Bureau and the Department of Education submitted a report to Congress on the private student loan market. Financial institutions voluntarily provided a one-time data set on their private student loan portfolios. As of the end of 2011, the total outstanding was estimated at $150 billion.
The market for private student loans is more opaque and therefore more difficult to estimate its growth. Most large portfolios of private student loans are held on the balance sheets of large financial institutions, where results on private student loan portfolios are often not separately reported in public financial statements.
Since the publication of the report to Congress, securitization of private student loans has increased. Based on these filings, as well as other publicly available information, the Bureau estimates that outstanding private student loan debt is approximately $165 billion.
While private student loans have a small share of the total outstanding, they are an important part of the market, given their disproportionate use by high-debt borrowers. Our report indicates that for borrowers graduating around the time of the financial crisis with over $40,000 in student debt, 81% used private student loans.
Other funding sources for higher education expenses: Estimates for outstanding student loan debt exclude other credit products that may be used for education expenses. However, many families utilize home equity loans, credit cards, and loans from retirement plans to pay for educational expenses. As a result, debt incurred for higher education may actually be much larger than the $1.2 trillion estimate.
Impact on other credit markets: The Bureau’s methodology does not allow us to see the other forms of debt that student loan borrowers have taken on. Economists at the Federal Reserve Bank of New York offer some insight on this question based on their analysis of a sample of consumer credit reports.
Interestingly, the analysis reveals that student loan borrowers are now less likely to have mortgage debt and auto debt than those without student loans , reversing a longstanding trend. This is consistent with tabulations of the Federal Reserve Board’s triennial Survey of Consumer Finance , which show increases in the portion of younger households with outstanding student loan debt and decreases in the portion of younger households with outstanding mortgage and auto debt.
The Consumer Financial Protection Bureau and other monitors of the financial system will continue to follow developments in the student loan market closely, particularly to understand the interaction between student debt and other sectors of the economy.
The Consumer Financial Protection Bureau (CFPB) is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit www.consumerfinance.gov.