The Burden of Debt

Understanding The Emerging Impact of Student Debt

Slow repayments of US student loans will remain key driver of growing balances as new borrowing slows

Excerpts of new market research from Moody’s. Full report is available here.

16 January 2020 — Student loan debt in the US (Aaa stable) was the fastest growing type of household debt in the last decade. In this report, we examine the factors contributing to the growth in student loan balances, and also highlight the social and credit implications of this rising burden. While in the past, higher enrollment and rising tuition were the main drivers of growing student loan balances, more recently, slow repayments have become the primary driver. Over the next few years, the combination of slow repayments and elevated, if no longer growing, levels of new borrowing will likely fuel further increases in outstanding debt.

» Rising student debt burdens have social and credit implications. At about $1.5 trillion, student loan debt is now the second largest outstanding liability for US households after home mortgages, and the evolving trends behind its growth have already affected credit quality in multiple sectors, including student loan asset-backed securities (ABS) and higher education institutions.

More than 45 million borrowers owe student debt, with the burden weighing on household finances and the broader economy. The high level of attention this issue receives from policymakers has led us to identify student loan ABS and education as sectors that face “high” credit risk from social considerations in our ESG heatmap because of their exposure to shifting policy agendas.

More than 45 million borrowers owe student debt, with the burden weighing on household finances and the broader economy...

» Student loan originations have slowed modestly after growing rapidly between 2000 and 2012, reflecting a recent decline in the number of students enrolled in higher education and a stabilization in college attendance costs relative to incomes. Annual student loan originations have trended downward since peaking at about $115 billion in 2012, declining around 8% overall, although they remain significantly higher than at the start of the 2000s. Going forward, we expect enrollment and attendance costs to remain relatively stable, restraining the level of new borrowing.

» Slow repayments mean outstanding debt will likely continue to increase. Over the past decade, the aggregate annual net repayment rate (or amount of existing balances eliminated each year) for US student loans has averaged about just 3%, and many recent graduates have not paid down their balances at all. For instance, only 51% of federal borrowers whose repayment obligations started in 2010-12 had made any progress in reducing their balances after five years. A variety of factors have contributed to slow repayments, including the expansion of income-driven repayment plans (IDRs) following the 2008 financial crisis, as well as borrowers opting for longer repayment terms.


Access the full report here.