How important are student loans to overall consumer credit growth? The next chart below shows total consumer credit in the top panel (the series that gets reported and analyzed), student loans in the middle panel (same series as in the chart above) and consumer credit less student loans in the bottom panel.
Take out government-owned student loans and there has been virtually no rebound in consumer credit since the Great Recession ended. Restated, the consumer has not been borrowing since the Great Recession has ended. Rather, students took advantage of below-market rates on loans provided by the government starting in 2009.
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Consumer Credit – Worse Than You Think
By James Bianco
The sharp rise in student loans over the past 3 years is a perfect example of what happens when credit is under-priced. Although lowering interest rates can drastically increase the demand for credit, it does not necessarily improve the ability of borrowers to repay by the same amount. Default rates on these recent loans will likely be higher than history has shown and the losses will ultimately be assumed by taxpayers. In the meantime, the burden of this debt will weigh heavily on younger generations forcing many individuals to put off buying a home.
Stagnant consumer credit outside of student loans has also been boosted by improving auto loans, for which sub-prime is back in fashion. The overall picture for consumer credit is therefore far less rosy than many in the media try to portray. Until this data picks up, inflation and economic growth will continue to underwhelm.