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Consumer Debt Expands for First Time Since Crisis

Lisa Scherzer
Personal Finance Editor
The Exchange

In a sign that American consumers' restraint may be easing, household debt rose at the end of last year after four years of declines.

In the fourth quarter of 2012, outstanding consumer debt rose 0.3% -- or $31 billion -- from the previous quarter to total $11.34 trillion, according to the latest report from the Federal Reserve Bank of New York.

Total debt, though, is still considerably lower than its peak of $12.68 trillion in the third quarter of 2008, at the beginning of the financial crisis.

Mortgage debt, by far the largest component of household debt, was about flat in the fourth quarter at $8.6 trillion. Non-housing debt is where the increase came, particularly student loans, which increased $10 billion from the previous quarter to $966 billion. In fact, student debt was the only type of consumer borrowing that continued to rise through the Great Recession and now has the second-largest balance after mortgage debt.

“The data provides early evidence that consumers may be reaching the end of the four year deleveraging cycle, though we’ll need to see if this is sustained in upcoming quarters,” Andrew Haughwout, vice president and economist at the New York Fed, said in a statement about the report. At the same time, he said, mortgage originations increased and fewer accounts entered the foreclosure pipeline but that delinquency rates remain considerably higher than pre-crisis levels.

Indeed, there’s been no shortage of signals pointing to an improving housing market. This week, the National Association of Realtors reported that the number of Americans who signed contracts to buy homes rose in January from December to the highest level in more than 2-1/2 years. [See: Toll Brothers CEO: ‘Housing Recovery Is the Real Deal This Time’]

"The report shows some clear signs of healing in consumer debt markets," James McAndrews, executive vice president of the New York Fed, said.

Further positive news from the report: Delinquency rates for most kinds of debt improved. According to the New York Fed, 8.6% of total debt was in some stage of delinquency, compared with 8.9% from the third quarter. Mortgage delinquencies fell to 5.6% from 5.9%.

“The overall picture points to continued signs of healing in consumer credit markets,” the Fed said.

Student debt, the 'big outlier'

Education-related debt is another story. Student loans continue to be the “big outlier,” McAndrews said. Between 2004 and 2012, the amount of outstanding student debt nearly tripled, increasing at a rate of about 14% a year. The New York Fed report attributed the increase to more borrowers, and more people paying for four-year colleges and graduate school.

Over the same period, there was a 70% increase in the number of borrowers as well as a 70% increase in the average balance per borrower.

Consider these figures: In 2005, more than 55% of student debt balance amounts were between $1,000 and $10,000, and 3.2% of balances were between $50,000 and $75,000. In 2012, the first percentage shrank to about 40%, while the latter rose to 6.5% of all balances.

About 17% (or 6.7 million) of the 39 million student loan borrowers were more than 90 days past due on their debt in 2012, a significant increase from 2004 when less than 10% of borrowers were delinquent. Those between 30 and 49 years old had the highest delinquency rates.

Donghoon Lee, senior economist at the New York Fed, said that if you include those borrowers who are neither delinquent nor in repayment yet (because they’re either in deferment, forbearance, or in an income-based payment plan), the effective number of those 90 days delinquent would actually come to 30%.