When gramps borrows for junior’s college

Student loans have turned into a multi-generational “ouch,” and “sharing the debt,” rather than the wealth, may be going beyond educational debt.

The trends behind this statement, discovered in research by TransUnion, hold some worrisome, atypical new implications for lenders. At the same time, they also hold some potential for expanding lending, prudently.

TransUnion has been studying many aspects of the consumer credit markets over the last few years, to see what’s evolved and to explore opportunities for lenders by slicing and dicing market data drawn from the company’s voluminous credit files—20 million+ consumers’ records were studied. A new focus on age versus credit usage and need has brought some interesting post-recession trends to light, according to Charlie Wise, one of the authors of TransUnion’s study and vice-president in the firm’s Innovative Solutions Group.

“The mortgage crisis and recession had a profound impact on the country, with many consumers still feeling the effects today,” says Wise.

Overlap among youngest and oldest

Wise says that the recession had lasting impacts on the extreme ends of credit users—consumers in their 20s and consumers 60 and older.

While the effects have been very different, there is also some commonality.

“While these groups differ greatly in their borrowing levels and wallet share compositions,” says Wise, “we also believe that their borrowing and wallet shares were likely impacted by each other.”

Here’s how: Wise says TransUnion believes that with unemployment remaining high for the last six years, many 20-somethings have looked to the older generations for financial assistance.

TransUnion’s analysis included the following credit types: mortgages, home equity lines of credit, auto loans; credit cards; and educational loans. The company refers to these forms of credit as “the big 5,” according to Wise. While the study focused on the 20s and 60s groups, Wise adds that much is going on in the in-between groups as well.

TransUnion’s concept of a credit “wallet” means the mix of debt a person or a group of people typically carry at a given age.

Let’s look at the study’s findings about the two groups. TransUnion focused especially on debt wallets in 2005, a pre-recession period; 2009, during the crunch; and 2014, the emergence from the recession.

The 20-somethings’ debt wallet

This generation pretty much got walloped by the recession and the rising cost of an education.

Student loan debt has hit them hard—its share of their debt wallet has nearly tripled over the last nine years. In 2014 education debt represented 36.8% of their overall debt, while in 2009 it came to 21.1%, and in 2005, only 12.9%. (For the study, data points were as of March 31 of each year.) Average student loan balances for this group have shot up by 60% since 2005.

This group also saw an increase—though not nearly so drastic—in share of wallet for auto loans, with auto debt hitting 14.1% of wallet in 2014, up 21.6% from 2005’s level of 11.6%.

Meanwhile, reflecting employment and mortgage market difficulties, both mortgage share of wallet and credit card share of wallet have fallen for this group. Wise points out that post-recession, mortgage lenders are less likely to make home loans to consumers with less-than-prime credit.

“It looks like student loans are crowding out mortgages,” says Wise, “though it may be more nuanced than that.” TransUnion is continuing this study in a second phase.

And while this group’s prime borrowers have increased its access to credit cards over the last decade, average card balances for 20-somethings have dropped significantly.

The 60-somethings’ debt wallet

As TransUnion points out in its research, the American population is aging rapidly, so that by 2025, just a bit over a decade away, one in three adults here will be 60 or older and only 16.3% of adults will be in their 20s. By contrast, in 1980 only 23.1% of adults were in their 60s. Age continues to be the main determinator of income and wealth—and credit eligibility.

Typically people in their 60s have tended to reduce their borrowings, but this is changing.

TransUnion found that the proportion of 60+ consumers with a loan of at least one type grew 22%—to 28% of this group in 2014 from 22.4% in 2005. By contrast, among people in their 20s, the portion with at least one loan has fallen, to 16.1% from 18.6%. That’s a fall of over 13%.

Furthermore, people in the 60+ group are running higher debt balances overall today than in 2005.

The 60+ group has been the only age group to increase its mortgage share of wallet since 2009—at an age when people used to get their home loans paid off. In addition, even credit card borrowing by this segment has been rising.

Wise says one reason for continuing mortgage borrowing may be the need to supplement limited income due to poor returns in these years of low interest rates and mediocre investment returns. That, and the need to borrow to help support children and grandchildren still suffering the impacts of the recession, and the impact of rising student debt.

Sharing the family educational debt angst

Indeed, this, according to Wise, is where the two groups are seeing their commonality. He says that 48% of borrowers 60+ are co-signers on student loans.

“It’s become a very real obligation for these seniors,” says Wise. They are both borrowing directly to pay for the younger generation’s education through student loans, or are borrowing through other channels to pay part of that generation’s student loan indebtedness.

This is a concern for lenders overall, a wrinkle not seen before. However, there are also implications for growth in portfolios.

“The good news for lenders is that there is a vibrant population of borrowers in their 50s and 60s today,’ says Wise. Many of these borrowers have prime credit status, making them a decent risk for lenders.

“Older consumers,” says Wise, “may still have a lot of borrower capacity.”

Student loan indebtedness has risen for both age groups. For 20-somethings, the average student loan balance per consumer with one or more student loan accounts rose to $25,525 in 2014, from $15,853 in 2005—and 51% of people in this age group have student debt. For 60+ consumers, less than 5% have direct student loan debt; however, the student loan debt for those seniors managing such debt has risen to $27,168 in 2014 from $14,696 in 2005—an increase of 85%.

While there is potential loan growth here overall, you still have to collect.

Notes Wise: “Rising debt levels by older consumers could lead to increased default rates if they are unable to meet higher loan payments with their often fixed incomes. This development certainly bears watching over the next several years.”