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Are household debt and student debt exploding?

On the importance of properly deflating

The graph above shows two series related to household debt that have received a great deal of attention lately: consumer credit (mostly lines of credit and credit cards) and student loans. These series show stark increases especially in recent years. But one has to be careful before jumping to conclusions, as the eye may be deceived here. First, the student loans shown here are only those that come directly from the federal government, and that specific program was introduced in 1994. So part of the increase is simply this program ramping up. But more importantly, one has to consider the important factors for the time period shown here: overall prices increased, population grew, and real incomes increased as well. Thus, it could be that these graphs simply show the increases in these three factors and nothing else.

To make things clearer, we need to divide by a measure that also increases along with these three factors and thus represents the size of the economy over the years. One popular candidate for this is nominal (that is, not real) GDP. It accounts for price, population, and productivity growth. The graph below is the same as the above, except that both series are divided by nominal GDP. The new graph still shows an increase for both series, but it’s not as dramatic. It also has the advantage of providing a frame of reference for the numbers: Total outstanding consumer credit currently amounts to about 20% of national income, and student debt is 6%. Whether this is excessive is open to debate. But one should focus on the data in percentages, not in billions of dollars.

How these graphs were created: Search for “consumer credit” and click on the desired series. Once you have the graph, go to the “Edit Graph” section and open the “Add Line” panel. Search for “student loans” and take the series with a longer time range. Apply formula a/1000 so that the units match. You have now the first graph. For the second, add a series to each line by searching for “GDP” (do not take real GDP) and apply formulas a/b and a/b/1000, respectively.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: FGCCSAQ027S, GDP, HCCSDODNS

Is college still worth it?

Re-examining the college premium

A recent symposium held by the Center for Household Financial Stability at the St. Louis Fed looks at the question of whether the college premium is still increasing and positive, using new data from the Fed’s Survey of Consumer Finances. On an absolute level, college graduates earn more than high school graduates, as shown in the graph above. This is consistent with the understanding that the benefits of a college education are greater than the costs.

If we look at the college premium, we can see that it has always been positive, indicating that there is a positive benefit of graduating with a bachelor’s degree. This graph shows that, at the end of the first quarter of 2018, college graduates received weekly wages that were 80 percent higher than those of high school graduates.

However, there’s more to this story. Recent research shows that the college premium may or may not be very strong depending on birth year, family, and other inherited characteristics. When looking at the wealth premium instead of just the income premium, the college premium was weak for all races and ethnicities in the 1980s cohorts, whereas the college premium exists for cohorts in earlier decades. A potential reason for this result is the high and rising cost of college. Over the past decade, we see an increase in the dollar amount of total outstanding student loans per total number of college graduates in the labor force, reaching almost $27,000 per college graduate available for work at the end of the first quarter of 2018. High levels of student debt may affect the ability to accumulate wealth, resulting in the declining college wealth premium. This is just one of the reasons for further investigation into the college premium, rising tuition costs, and how education influences economic well-being.

How these graphs were created: For the first graph, search for “wages bachelor’s degree” and select the quarterly data series to add to the graph. From the “Edit Graph” panel, go to “Add Line” and search for “wages high school” and select the corresponding series. To create the second graph, use the same steps to get to the “wages bachelor’s degree” series. Then under the “Customize data” section, search for “wages high school” and select the series. Then enter in the formula (a/b) – 1 to get the college premium. For the third graph, search for “student loans” and select the series for outstanding student loans. From the “Edit Graph” panel, go to “Customize data,” search for “bachelor’s labor force level” to add to the graph. Then in the formula bar, divide line 1 by line 2 and adjust units to show dollars (i.e., enter a/b*1000000).

Suggested by Suvy Qin and Christian Zimmermann.

View on FRED, series used in this post: LEU0252917300Q, LEU0252918500Q, LNS11027662, SLOAS

The rise (and fall?) of the cost of education

Education inflation appears to be converging with general inflation, at least for now

For many years, the cost of education has risen steadily and significantly more than the general level of prices. This trend has led to numerous complaints that education is out of reach; it has also led to a boom in student loans. The graph clearly shows how education inflation (blue line) has been above general inflation (red line) every year since 1994. And, again, quite significantly so. The past few observations, however, exhibit a marked reversal, with one observation even showing CPI inflation higher than education inflation. Does this mean education will become relatively more affordable now? It’s difficult to say from current data, especially since there have been two other episodes, in 2008 and 2011, when the two series converged only to diverge again. Time will tell if this latest development is pomp or circumstance.

How this graph was created: Search for “CPI Education” and create the graph. From the “Edit Graph” section, under “the Add a Line” option, search for and select CPI. Choose units “Percent Change from Year Ago” and click on “Copy to All.”

Suggested by Christian Zimmermann.

View on FRED, series used in this post: CPIAUCSL, CUUR0000SAE1

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