Americans are slowly but steadily getting rid of debt. Total household debt is declining, along with delinquency rates and debt per capita, according to data released today by the Federal Reserve Bank of New York.
But the story is different for student loan debt, and the implications could be far-reaching.
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"Student loan debt continues to grow even as consumers reduce mortgage debt and credit card balances," said Donghoon Lee, senior economist at the New York Fed, in a statement accompanying the figures. "It remains the only form of consumer debt to substantially increase since the peak of household debt in late 2008."
Some people call student loan "good debt" because it often leads to lifelong higher earnings. But that's only one metric of how to look at it. "I look at it in short-term versus longer-term implications, and the student loan situation has significant implications," says Joel Naroff, president of Naroff Economic Advisors.
As a share of the nation's total debt, student loan debt is not that big. As of the first quarter of this year, it made up only around $904 billion of the nation's $11.4 trillion household debt burden. But while that total burden has decreased, from nearly $12.7 trillion in late 2008, the student loan share of it has grown, from around 3 percent in late 2003 to 5 percent in late 2008 to its current level of 8 percent.
Similarly, delinquency has decreased...but not for student debt. Nearly 91 percent of Americans' debt balances were current as of the first quarter, compared to around 88 percent in the fourth quarter of 2009, representing progress toward prerecession levels, when 95 percent to 97 percent of balances were current.
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However, while delinquency has declined from recent highs, particularly for credit cards and mortgage debt, student loan debt delinquencies remain stuck in high places. Around 8.7 percent of the total student loan balance is 90 or more days delinquent, up from 8.5 percent the previous quarter and down only slightly from a peak of 9.2 percent in late 2010. In contrast, severely delinquent credit card balances have declined by nearly 2.5 percentage points, from 13.7 percent in 2010 to 11.3 percent last quarter.
Paying down debt in general has a short-term negative impact on broader economic growth, says Naroff, but means longer-term stability for those who do deleverage.
"To the extent that people are capable of paying down debt, they are diverting some of the funds that they might have used to borrow to retire debt, and they feel a lot more comfortable doing that," he says.
But lingering student loan debt, which hits many all at once in the early 20s and can defer purchases for a decade or more, threatens to cripple many people's abilities to make purchases large and small.
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"That has tremendous implications for spending for this whole generation that's coming out of college," he says. "The reality is that a lot of their money in the first decade out of school is going to go to paying down their student loans."
And aside from slowing those young grads' spending, he says, it means that many young people will no longer be able build up the money needed to purchase a home, potentially prolonging the pain in an already sluggish housing market.
"How much that's happening in the short term right now is unclear, but will it have an impact in the longer term? I have little doubt that's going to be the case," he says.
Of course, those loans ideally lead to degrees, which many students had banked on leading to higher wages. Another problem isn't that students are taking out loans; it's that incomes aren't increasing alongside borrowing.
"One of the biggest problems, one of the biggest causes that precipitated the last crisis is people were taking on more debt, mortgages that were more expensive than they needed to be, and they didn't have the incomes [to afford them] either because they lost their job or because housing outstripped people's ability to afford it from their income level," says Ellen Schloemer, executive vice president at the Center for Responsible Lending.
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That problem could be mirrored in today's graduates. Recent graduates' incomes have been trending downward. According to the latest The Condition of Education report from the National Center for Education Statistics, the median annual earnings for someone age 25 to 34 with a bachelor's degree only was $45,000 in 2010. That has trended steadily downward from 2007's inflation-adjusted $47,100 and is well below 2000's median of $50,500.
Altogether, it's another example of the vicious cycles at play in the economy—with household debt, low incomes, and a weak housing market all feeding into each other, a full recovery can seem perpetually out of reach.
Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter at @titonka or via E-mail at dkurtzleben@usnews.com.
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