Source: Pew Research Center
WASHINGTON— More Americans are willing to go into debt to go to college and to buy cars and homes as people gain confidence in the economy.
Student loan balances jumped by $125 billion over the past year to $1.2 trillion, , which is more than any other type of household debt other than mortgages.
Total consumer debt rose $129 billion to $11.65 trillion in the first quarter of this year, according to a quarterly report by the Federal Reserve Bank of New York Tuesday, marking the first time total consumer debt has grown for three consecutive quarters since the summer of 2008.
For the quarter ended March 31, mortgages—which make up the largest portion of household debt—increased 1.4 percent to $8.17 trillion. Auto loans climbed 1.4 percent to $12 billion.
While high debt levels may seem bad, debt is an important tool for growth in the economy, said Benjamin Harris, a fellow in economic studies at the Brookings Institution.
“Debt isn’t necessarily a bad or good thing,” Harris said. “It allows us to borrow to both consume later on down the line and finance investment, like student loan debt.
A recent report on student loans by the Brookings Institution suggests that most people who have student loans bear relatively low levels of debt while only a small proportion of borrowers have exceptionally high balances. As of 2010, around three-quarters owed less than $30,000, about 25 percent owed less than $7,000 and about 5 percent owed more than $92,000. Moreover, as a bigger portion of people’s income goes towards paying off student loan, delinquencies have also marked up relative to that.
“People who think that taxes should be low and government should be smaller, the byproduct is that people are paying more of their educations,” Harris said.
The wealth gap between young college graduates and those without a college degree is wider than ever, according to an analysis of government data by the Pew Research Center. A young, college-educated person holds twice as much debt—which includes mortage, auto, credit card and student loans— as a college graduate who has no student loan debt. On the other hand, a person who went to college makes nearly twice as much as someone without a bachelor’s degree.
Dean Obenauer, assistant director of financial aid at Creighton University in Omaha, Nebraska, said students should only borrow the amount they need and create a budget in order to responsibly take out student loans.
“If they have borrowed more than they need, we tell students we will actually return it to the student loan servicer for them,” Obenauer said. “Some students aren’t thinking far ahead enough to think about what they need…It’s about trying to live that frugal lifestyle, just being minimal for right now. It’s not for the rest of their life.”
The federal income-based repayment schedule is also an option for college graduates, where they make monthly payments based on their income rather than a fixed amount.
Pew’s research also found that college graduates who took out loans to finance their education were less satisfied with their financial situation than those who did not borrow money for college.
Student loan debt has increased over the years as more people pursue higher education and college costs continue to rise. But Obenauer said four-year colleges aren’t for everyone.
“I think studies still show overall the lifetime, a college education will lead to more earning potential and that’s over a lifetime, but there are just some students out there where college is not a fit,” Obenauer said. “There’s a huge need for technical programs like electricians, welding and plumbing.”
Harris said consumer debt could become a problem for a few reasons: it reduces some consumers’ access to credit, and an inability to pay off the debt leads to high delinquency rates and a larger share of disposable income going towards paying off debt.
The Brookings report also noted that student debt burdens can mean borrowers don’t seek graduate education, marry later, delay home purchases and even make different career choices.
“We saw it during the great recession when credit froze up and people couldn’t borrow to start a new business or to buy a new home,” Harris said.