Does student loan debt block credit access?

There is a stereotype today about the recent college graduate, so mired in student loan debt that starting a post-education “normal” life seems nearly impossible. Call it an urban legend or a foregone conclusion. The thing of it is, TransUnion says the common picture doesn’t jibe with reality.

New research conducted using TransUnion’s consumer credit records indicates that in spite of the common picture of former students laboring under crippling student debt, many of these younger consumers have been gaining access to other forms of basic credit—auto loans, credit cards, and mortgages—and that they generally pay this additional debt on a timely basis.

TransUnion’s study arrived at these conclusions by comparing student loan debtors to a control group whose members don’t have such debt. The groups’ behavior and opportunities don’t always track exactly, due to timing differences in employment and more, but the collegiate group typically has caught up, and sometimes even overtaken the study’s control group in opportunity, usage, and performance.

Overall, the study “shows lenders that rather than being concerned about student loan borrowers’ ability to manage new credit, this may actually be an attractive marketable group, both in terms of higher credit demand as well as potentially better repayment performance,” says Charlie Wise. He is a co-author of the study and is vice-president in TransUnion’s Innovative Solutions Group.

The company goes so far as to suggest developing marketing campaigns that target student loan borrowers for consumer credit. At the same time, TransUnion notes in its study that both the number and outstanding balances of student loan accounts have doubled since the end of the Great Recession. Just over half—52%—of U.S. consumers age 20-29 currently carry a student loan balance, and this indebtedness, up 186% since 2005 for this age group, currently represents 36.8% of their “loan wallet.” Only their mortgage indebtedness—42.9% of the loan wallet—exceeds this burden.

Student loan balances stood at $1.1 trillion in the first quarter of 2015.

Parsing impact of student loan debt

TransUnion’s study examined the behavior of student loan borrowers between 18-29 who entered their repayment cycle in three different time periods: Q4 2005 (when the economy remained strong); Q4 2009 (right after the crisis hit); and Q4 2012 (the most recent period).

The study looked at their behavior for two years after the commencement of each group to repay student debt. Researchers compared this to control groups of the same age range without student debt. (The individuals in each sample aren’t all the same, of course, as consumers “aged in” and “aged out” of the demographic groups.)

The study methodology is quite detailed. This account will stick to highlights in two areas: whether the student loan borrowers have other loans and have been able to obtain new card, auto loans, and mortgages, and how well they manage new loans.

The TransUnion study considered credit cards; auto loans; and mortgages.

Overall, the study found that while they are in school, student loan borrowers may be less likely to have a job, which impedes most credit from being granted.

“However, most catch up once they leave school—and their ability to catch up has not changed over the past decade,” says Steve Chaouki, executive vice-president and head of TransUnion’s financial services business unit. The study found this was so in spite of post-recession challenges in finding jobs.

TransUnion also noted that percentage of borrowers 18-29 with credit products dropped between 2005-2012 overall, due to the relative weakness of the economy.

Card borrowing

In this area, beyond the impact of debt and the economy, there was the implementation of the CARD Act of 2009, which went into effect in early 2010. This legislation severely restricted marketing of cards to consumers under 21 years old.

In the 2009 sample, student loan borrowers were ahead of the control group in having bank credit cards, though down from their participation in 2005. The 2012 sample, where the impact of the CARD Act’s restrictions would have had a broader impact, the control group initially pulled ahead but over time, into 2014, the student loan borrowers caught up.

Auto borrowing

For this area, the 2005 analysis found that after two years, student loan borrowers and members of the control group had identical rates of auto borrowing. This pattern held in the 2009 sample. In the 2012 sample, a gap remained after two years, into 2014, which appears to relate to the Great Recession, but that gap narrowed a great deal over the 2012-2014 period.

A key wrinkle is that student loan borrowers—presumably due to greater earning power with a degree—pulled ahead of the control group in new borrowing to purchase autos.

Mortgage borrowing

Again, the 2005 sampling exhibited a catchup, albeit with a gap remaining, between borrowers with student loans and the control group in participating in mortgage credit. In terms of new mortgage borrowing, the two groups were much closer, although a small gap continued.

The pattern in participation continued in the 2009 sample and into the 2012 sample. However, in the 2012 grouping, overall participation was depressed for both groups. In terms of new mortgages, both groups saw a downtrend in availability, but their rates of obtaining new credit for homes continued to be close to each other. The control group was ahead, but trailed closely by the student loan borrowers.

“Both populations appear to have been equally impacted by the tightening of mortgage lending,” according to TransUnion.

Updating the groups

The study looked at the two older groups—2005 and 2009—to see where things stood after the two-year periods discussed. Among the 2005 samples, the student loan borrowers stand far ahead of the control group in terms of both auto and mortgage credit participation, as of the fourth quarter of 2014. Among the 2009 groups, the student loan borrowers had passed the control group in auto borrowing and has nearly caught up in mortgage borrowing.

How well do they pay?

Overall, TransUnion says, “performance on new accounts by student loan borrowers is as good as or better than consumers without student loans.”

Among the statistics reported, among the 2009 samples, student loan borrowers had lower delinquency rates on new auto and bank card loans. Among the 2012 sample, this trend continued in the same categories.

Download TransUnion’s study PowerPoint: “Are Student Loans Really Hurting Consumers? The Impact of Student Debt on Consumer Lending” [Registration required]