As of June 30, total household indebtedness was $12.29 trillion, 10.2 percent above the recent low in 2013, but 3.1 percent below the peak seen in 2008. But not all debt is created equal. In fact, every time the Federal Reserve Bank of New York releases its quarterly report on household debt, various media outlets report on the findings with scary headlines suggesting that a new bubble has inflated around a different type of debt, and that bubble is about to burst.
The most obvious candidate for the next bubble is student loan debt, which has ballooned to $1.26 trillion. To put that in perspective, federal student loan asset levels stayed at about $100 billion from 1995 to 2010, but as college costs soared, more families turned to debt to finance their coveted degrees. That’s why the total amount of education debt has climbed.
The large outstanding balance would not be such a big problem if everyone who took out a loan completed his or her studies and then got a job, allowing for adequate servicing of the loans. But that has not been the case, especially after the recession and weak recovery. As The Wall Street Journal reported in April, more than 40 percent of Americans who borrowed from the government’s main student loan program are either not making payments or are behind in making payments. As of the beginning of this year, about 3.6 million borrowers were in default on $56 billion in student debt, and another 3 million who owe $66 billion were at least a month behind.
Those numbers look scary and lead many to worry that the next debt meltdown will occur in the student loan market. However, there are big differences between the mortgage and student loan markets. The biggest, according to a report from Vanguard, is size. When the real estate market melted down amid the financial crisis, mortgage debt represented the equivalent of nearly two-thirds of the country’s gross domestic product. That’s huge, especially compared to student loan debt, which is equivalent to less than 10 percent of GDP.
Size also matters in the amount of debt being carried by the borrower. Despite horrible stories of six-figure education loans, most students carry $25,000 to $35,000 (actual figures vary, depending on who is calculating) — which is still steep but more reasonable. According to Brookings research and policy institute, median student loan debt is much lower — $13,000 — which seems like a pittance compared to the average mortgage debt of nearly $100,000 at the peak in 2007. So while more than a trillion dollars of student loan debt is massive, it pales in comparison to the mortgage bubble.
Another area of concern when it comes to debt bubbles is the rise in subprime auto debt. Auto loan debt has been rising at an annual rate of about 10 percent for the past three years, and subprime loans (i.e., loans to borrowers with credit scores below 660) have comprised the fastest-growing segment of the market, accounting for about 35 percent of all new originations. Nevertheless, analysts at Capital Economics, an independent macroeconomic research firm, have found that “subprime auto loan origination is still lower than it was in 2006.” And although $1.1 trillion of total auto loan debt is above the previous peak of $820 billion in 2006, interest rates are a lot lower than they were a decade ago, which means the cost of servicing debt is down significantly.
There is nothing wrong with being on the lookout for future debt bubbles. After all, the economy is still absorbing the aftereffects of the bursting mortgage debt market. So while the two leading contenders for future problems — student and auto loans — are not yet in the same realm as mortgages, they bear close scrutiny in the future.
Jill Schlesinger, a certified financial planner, is a CBS News business analyst. She welcomes emailed comments and questions.