June 9, 2010

Student Loan vs Mortgage Debt Levels

I've seen numerous sources referring to student loans and college spending as a looming financial bubble.   It seems people fear that student loan debts might have the same kind of impact that the real estate bubble had.  I'm not sure that I agree that student loans or college costs are the same kind of financial bubble, but if it is then whats the extent of the problem?    If college spending is a bubble then is it as big of a bubble as the real estate bubble?   I think we can look at this by comparing student loan debt levels to mortgage debt levels.

First of all, lets just think about how common and large mortgage debts are versus student loans.  70% of Americans own homes and most of those people have some form of mortgage.   About 30% of Americans have college degrees.  Houses cost significantly more than college.   Most of a typical home purchase is financed.   College costs are paid for by scholarships, government grants, help from parents, etc in addition to loans.  Home loans last 30 years usually and student loans more often have terms of 10 years.  More people have mortgage debt, the mortgage debt is higher amount and the repayment terms of mortgage debt are longer.   It would seem from simple observation by comparing mortgage lending to student loans that there is significantly more mortgage debt than student loan debts.

We can find statistical data on the amount of debt.   In 2007 the Survey of Consumer Finances data we can get the amount of the average household debt in various categories.

46% of families have a primary mortgage with mean value of $149,500
8.5% of households have a 2nd mortgage with mean value of $39,200


15.2% of families have education loans with average of $21,500

The average values are only for those families who have the debt in question.  So for student loans 15.2% of families have student loans averaging $21,500 and the other 84.8% of households have $0 loan debts.

The data above is from 2007 so its 3 years old now.  Mortgage Debt levels actually peaked in 2008 and then dropped back down and have since started to creep up again.  Federal reserve Z1 data has more info on total mortgage debt level.  After peaking in 2008 the mortgage debt in the USA is about equal today as it was in 2007.   I don't have current debt information for student loans, but I would guess that it has increased.   From 2004 to 2007 the average amount of student loans went from $16,700 to $21,500.

I would make a couple points from the SCF 2007 data:

The vast majority of households have no student loan debts. 


The total of all student loans in the USA is about 5% of the amount we owe on home loans.

Student loan debts are increasing and the issue is not trivial.   The amount of debt is increasing due to two major causes.  More people are going to college and college costs are increasing swiftly.   Those two factors multiply to increase the amount of student debt.

If student loans turn out to be a financial bubble like real estate bubble it would seem that the size of the bubble is a small fraction in value and the exposure is limited to a smaller minority of the population.    Student loan debts will not be the same kind of financial disaster that the real estate bubble and sub-prime mortgage crisis resulted in.

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