Bloomberg.com – Consumer Credit in U.S. Increases by Most in 10 Years
Consumer borrowing in the U.S. surged in March by the most in more than a decade on growing demand for educational financing and autos. Credit rose by $21.4 billion, the biggest gain since November 2001, to $2.54 trillion, Federal Reserve figures showed today in Washington. The advance was paced by a $16.2 billion jump in non-revolving debt, including student and car loans. Americans may have been trying to get school financing before a possible increase in interest rates takes place on July 1. Rising consumer confidence also means that households are more willing to take on debt to boost spending, which accounts for about 70 percent of the economy.

Comment

The story above, like most stories on consumer credit, does not seem to understand the effect that student loans are having on consumer credit.

The chart below shows government-owned consumer credit (red line) and student loans (blue line) are one and the same.  You only see one line below because these two series are virtually identical as all student loans are bought by the government and the government currently owns virtually no other type of consumer credit.

Click to enlarge:

As shown above, student loans have gone parabolic thanks to a 2009 government mandated cut in student loan interest rates that expire July 1st.

How important are student loans to overall consumer credit growth?  The next chart below shows total consumer credit in the top panel (the series that gets reported and analyzed), student loans in the middle panel (same series as in the chart above) and consumer credit less student loans in the bottom panel.

Take out government-owned student loans and there has been virtually no rebound in consumer credit since the Great Recession ended. Restated, the consumer has not been borrowing since the Great Recession has ended.  Rather, students took advantage of below-market rates on loans provided by the government starting in 2009.

What happens to these student loans next?  From the story above:

The rate on student loans is set to double on July 1 without action by Congress. The rate increase would affect about 7.4 million students, according to the White House, adding an average of $1,000 a year in payments on college loans.

President Barack Obama last week sought to keep pressure on Congress to freeze the interest rate on federally subsidized student loans, saying a higher education can’t be an unaffordable luxury for middle-income Americans.

Some economists were concerned the jump in educational lending reflected a poor job market.

“Most of the improvement in credit is a function of the explosion student loan debt,” said Neil Dutta, an economist at Bank of America Corp. in New York. “The reason student loan debt is exploding? Because the youth population is having difficulty finding work. Hardly a good reason for credit extension.”

Final Note

The government has always subsidized education, a noble goal that has consequences.

Whenever anything gets subsidized, demand increases.  And without an increase on supply to offset it, the price rises.  As the chart below shows, the price of education has been significantly outpacing core inflation.  This is the consequence of below-market loans.

Huffington Post – The Most Expensive Colleges In America
Sarah Lawrence College: $59,170
New York University: $56,787
Columbia University: $56,310
Harvey Mudd College: $55,998
Eugene Lang College: $55,890
Claremont McKenna College: $55,865
Wesleyan University: $55,706
Bard College: $55,617
Barnard College: $55,566
Trinity College: $55,450

Source: Bianco Research

Category: Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “Consumer Credit – Worse Than You Think”

  1. Mike in Nola says:

    You got it right. Actually, it may be worse than that as I’ve heard/read several things indicating that student loans are now being used as a substitute for conventional credit be those who are no longer creditworthy. I’m 60+ and get lots of student loan offers. With all the for-profit schoools out there, it would be pretty easy to get in and rack up a lot of debt.

  2. Mike in Nola says:

    As long as I’m ranting, will repeat that it was publicly stated by a respected local law prof that professional schools are seen as profit centers by universities. They don’t need much in the way of facilities and can pack lots of students in an auditorium and charge them lots. I’m sure it’s the same for MBA’s, etc. Of course, they get them to take out loans to pay for all this by telling them how much they will make when they get out. That’s why so many young “professionals” are working for peanuts and burdened with debt.

    But it does support a lot of oboe students.

  3. dead hobo says:

    Dude, one chart is scaled in the billions. The others are in trillions. A trillion is 1000x a billion. FYI. The scaling with respect to the origin is a little weird too with respect to comparisons.

    Agree student loans are a racket that do more to subsidize the schools than benefit the students. But the kids will eventually learn. Of course, it takes a special kind of stupid to borrow perhaps $50,000 to study philosophy or old English history.

  4. BennyProfane says:

    “You only see one line below because these two series are virtually identical as all student loans are bought by the government and the government currently owns virtually no other type of consumer credit.”

    Really. Amazing how trillions of mortgage debt is just ignored with that statement. I know, I know, technically it’s not “consumer credit”, but, c’mon, let’s get real. And, how about the trillions of second liens on real estate, that we all know is used for consumer items. Hell, how do you think millions of credit card bills were paid off since the ninties?

    ” “The reason student loan debt is exploding? Because the youth population is having difficulty finding work.””

    Well, that may be one factor, but, how about the status race that both parents and students participate in to graduate from the “finest” of schools and add on a very expensive MA or other professional degree in pursuit of the good life? I would also not ignore the housing bubble in the inflation of college costs – it was so easy to borrow off the MacMansion to fund Bobby or Sally’s English degree at Party U, and that momentum is still with us as the kids sign on the dotted line for debt servitude until the grave.

  5. DeDude says:

    I am not sure why we talk about government “subsidizing” student loans. Government can currently take out 30 year loans at a 3% rate. If you added 10% to that rate for administration (medicare has less than that in administrative costs and is a lot more complicated), we would end at a rate of 3.3%. So government could provide student loans at 3.3% without any cost at all to taxpayers. The only reason government has to “subsidize” to move rates from 6% to 3.3% is that we are doing the “administration” via the inefficient profit seeking private banking sector. So who exactly is it that is being subsidized? Government could either run a 3.3% student loan program itself at no cost to taxpayers, or a very expensive 3.3% student loan program jamming huge profits into the financial sector – so again who is it that taxpayers are subsidizing?

  6. Dr. Goose says:

    “Though college, I felt, was a sure thing,
    As of now, unless gold I’m unearthing,
    To pay off my loan,
    I’ll have to postpone
    My homebuying, wedding and birthing.”

  7. formerlawyer says:

    @DeDude Says:

    They tried this before – any bets on how it was defeated?

    http://www.msnbc.msn.com/id/36014592/ns/business-us_business/t/banks-lose-billions-student-loan-revamp/#.T6qZ2e18Zsg

    On student loan” statistics” See, especially the comments
    http://blogs.reuters.com/felix-salmon/2011/10/21/the-murky-world-of-student-loan-statistics/

  8. ashpelham2 says:

    With the bankruptcy laws the way they are, there will be no recourse for those students who borrowed up to their necks for degrees that didn’t get them much of an income or a job. And we all know that student loan debt is generally not dischargeable. If it were, then it would be considered income or debt forgiveness, which would incur a tax debt and penalty that would also be un-repayable.

    You just can’t get blood from a turnip. We are all going to be selling insurance to one another in the future.

  9. [...] Some folks made a fuss about the big jump in US consumer credit in March. This reflected poor knowledge of the data. The data is appropriately dissected here. [...]

  10. [...] insurance – NYT CHART: Consumer credit, minus student loans, looks rather grim – The Big Picture The unemployment rate would be 7.1% without government job cuts – WSJ Rortybomb destroys David [...]

  11. EIB says:

    Take out government-owned student loans and there has been virtually no rebound in consumer credit since the Great Recession ended

    Well, DUH. Why would there be? Consumer loans are MUCH more likely to default today than in 2008. Consumer credit should have been greatly contracted by now. Even MORE than it has. It should be 10% of what it was in 2008. This should not surprise anyone but a dunce!

    ~~~

    BR: You seem to have a problem with quantifying data, preferring squishy assumptions. Add to that the unsupported assertions you make, and that adds up to a big fat FAIL around these parts.

  12. EIB says:

    Isn’t it common sense? Recession = higher default risk. And, rates are low. Terrible risk/reward. Are YOU going to loan your money to some guy seeking a credit card? Doesn’t take a market data feed to figure this out, if you ask me.

  13. blackjaquekerouac says:

    “trillion dollar blow up number four.” courtesy of the Government again! As long as Chicago is wiped off the map to pay for it i really don’t care. In fact “how could i care anymore.” it is all the authorities want anyways….

  14. Woj says:

    The sharp rise in student loans over the past 3 years is a perfect example of what happens when credit is under-priced. Although lowering interest rates can drastically increase the demand for credit, it does not necessarily improve the ability of borrowers to repay by the same amount. Default rates on these recent loans will likely be higher than history has shown and the losses will ultimately be assumed by taxpayers. In the meantime, the burden of this debt will weigh heavily on younger generations forcing many individuals to put off buying a home.

    Stagnant consumer credit outside of student loans has also been boosted by improving auto loans, for which sub-prime is back in fashion. The overall picture for consumer credit is therefore far less rosy than many in the media try to portray. Until this data picks up, inflation and economic growth will continue to underwhelm.

    http://bubblesandbusts.blogspot.com/2012/05/james-bianco-consumer-credit-worse-than.html

  15. piezoe says:

    More nonsense! You guys are fired! First point: no one throws a list of atypical boutique schools into the middle of an article like this unless your intention is to mislead, or you are so hopelessly lost that you are incapable of telling truth from fiction. Second point: no one in their right mind, except the Fed, uses the Fed’s core inflation number for anything, unless they want to mislead. Third point, using any reasonable measure of consumer price inflation (may I suggest shadowstats.com) one learns that overall college and university tuition has just kept pace with consumer inflation (barely!) — you know, the kind of inflation where you have to use energy and consume food. This real consumer inflation has been averaging around 5-6%. Third point: state and local subsidies of public higher education institutions has been declining — over the last two decades by about10%. Combine that fact with the fact that tuition has just barely kept up with real consumer inflation –real every day inflation not the phoney government version where hedonics are used to reduce the number– and knowing that tuition is only a part of a college’s or university’s revenue, you can easily grasp, unless you are the neanderthal that penned the above article, why colleges and universities are struggling to pay the bills and maintain academic integrity.

  16. [...] http://www.ritholtz.com/blog/2012/05/consumer-credit-worse-than-you-think/ This entry was posted in Uncategorized. Bookmark the permalink. ← The United States committed to a form of cultural and economic suicide [...]

  17. warrenmurdoch says:

    If a student graduates with a taxpayer guaranteed loan, the institution from which he graduates should be required to retain part of that loan in its endowment. Further, any losses from the loan should be born by the academic institution first before taxpayers make good the loan. If the education is as valuable as some admissions officers claim, the school should not be worried about holding part of the loans.