It’s a boost for consumer borrowing, but some analysts are worried. A new report that came out this week revealed Americans took out more student and auto loans in September in record numbers. Total consumer borrowing rose $11.4 billion in September, the Federal Reserve reported on Wednesday. Not counting mortgages and housing related expenses, total consumer debt stands at $2.74 trillion. This is the highest level on record.
Credit Card Borrowing Down
Perhaps what’s most interesting, though, is that credit card borrowing dropped by $2.9 billion. This is the third drop in as many months. Loans held by the federal government, historically which are mostly student loans, increased $13.8 billion. Is this a sign we’re becoming more confident in the economic recovery? Maybe, say some. But the drop in credit card borrowing would indicate otherwise. Not only that, but this information, when mirrored with information from the summer, might suggest something else.
A report by NCLC this past August showed student loan defaults were rising and 80% of those with debt were unemployed. Nearly 85% of those were also on some kind of government assistance. Slightly less than half – 47% – actually graduated college. Worse, the study revealed a large percentage had no idea they were even in default on their student loans. But those who were said they could find a job. The most shocking aspect, though, is that these college students were no longer even being counted into the unemployment rate because they’d been there so long. They said these reasons were reason enough to not have to repay their loans; a full 90% of those surveyed agreed with that. This takes them out of the running for credit cards, mortgages and automobile loans and when reminded of that, most were nonplussed and said they weren’t in the market anyway because they had no jobs to pay for them.
So why the sudden increase in student loans? The answer is the same now as it was over the summer: no jobs means a lot of free times. By applying to attend college, many are able to take out the loans to pay tuition with money left over. This would account in the credit card usage drop, too. Interestingly, it can also account for new car sales and higher profits that are being reported at retailers across the nation.
This all makes little sense in many aspects, especially for those trying to account in rising student loan debt, but drops in credit card debt – could it be as simple as not needing credit cards because of cash provided via student loans? Many analysts say yes and in f act, when you break it down, it supports that conclusion:
- Total debt is a record high,
- Credit card debt is down,
- Unemployment remains stalled,
- New car sales are up.
There’s no other reason, really, they say. It makes no sense that people are buying new cars and attending school. Throw in concerns about the fiscal cliff, and it all suddenly makes sense. People have become numb. They’re tired of feeling as though they’re in a vicious cycle with no out and many even say they had credit cards and strong credit ratings in the past, but now they know their credit is shot, so therefore, they don’t even apply for new accounts.
The obvious plays a role: responsible consumers who don’t want to assume anything when it comes to the economy, but those with that mindset are dwindling. It’s more of a “I’ll get them before they get me” mentality Americans are adopting. The “they” being creditors and even the government.
Remember, credit card usage has been in a steep decline since the 2008 credit crisis. At the end of 2008, Americans carried $1.03 trillion in credit card debt, which was an all time high at that point. By the end of September 2012, that figure was 17.1 percent lower. Second quarter numbers show student loans totaled $914 billion. This, according to the Federal Reserve Bank of New York, shows a 50 percent increase in the numbers from that same quarter in 2008. Every report shows student loan debt has increased dramatically. The non plussed attitudes and loss of faith in a recovery is the only explanation that works in the minds of many economists.
One final note from the Federal Government: the percentage of after-tax incomes that Americans are using to pay interest on all debt, including mortgages, fell to 10.7 percent in the second quarter. This is a sharp drop of 14 percent at the end of 2007, when the recession began.
So what are your thoughts? Do you agree with those who say we’ve become a nation of hopeless folks who are now focusing more on financial survival or do you think there has to be a better explanation? Are you carrying student loan debt? Share your stories and thoughts with us – it’s the only way a true snapshot emerges.