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Mon July 8, 2013
Consumer Credit Expected To Rise, Fueled By Student Loans
New consumer credit numbers come out Monday afternoon, and the expectation is that consumer credit will rise, as it has for 20 straight months.
This has been fueled mainly by student loans, but it raises questions about how households can take on this debt, and whether they’ll see a return on their investment.
JEREMY HOBSON, HOST:
From NPR and WBUR Boston, I'm Jeremy Hobson. It's HERE AND NOW. And it's time now for some business news. The Federal Reserve is out today with the latest on consumer credit, which has been on the rise for almost two years. That means banks are lending more, raising questions about whether they're getting too big to fail again. Joining us now is Heidi Moore, finance and economics editor for The Guardian. Hi, Heidi.
HEIDI MOORE: Hi, Jeremy.
HOBSON: So where is all this additional borrowing coming from, first of all?
MOORE: Well, interestingly, it's coming from student loans.
MOORE: By far, since the Great Recession, the greatest proportion of borrowing for Americans has been student loan debt, which you can maybe guess by the fact that there are now $1 trillion in student loans outstanding. And...
HOBSON: Yes, some have talked about a student loan bubble.
MOORE: Yeah, exactly. It feels that way. It feels unsustainable, you know, because for the average household, where you haven't seen incomes rising over the past few years, the question is: You're getting into more debt, but how are you going to pay it off? It implies a lot of optimism for the future. But also, you have to wonder, you know, are we digging ourselves into a hole we can't actually get out of?
HOBSON: And there's, of course, this debate going on right now about the interest rate on some new student loans and whether that should be allowed to rise. How does that play into all of this?
MOORE: Yeah, absolutely. I mean, Congress had the chance to prevent federally subsidized student loans from doubling their interest rates. So right now, the interest rate is around 6.8 percent, which, at the top range of borrowing, would be about $30 more a month. But, you know, if you're a student just out of school, $30 more a month, you know, times 12 months is really going to be useful to you. And all of a sudden, you're paying that in interest for no good reason, because Congress couldn't get its act together, which is absolutely ridiculous. So what Congress wants to do is somehow roll that back. Let's hope that they do. But, you know, the majority of people who are going to be struggling with their student loans don't have federally subsidized student loans. They have private loans through banks.
MOORE: About $150 billion of loans come through banks. And those people are paying interest rates of 10 percent, 12 percent, 15 percent, and there's no help in sight for them.
HOBSON: All right. Now, the other thing that is driving this increase in consumer credit is car loans.
MOORE: Yeah, absolutely. You know, that's a good sign, because car loans generally are smaller than other kinds of loans. They're smaller than student loans. They're smaller than mortgages, and they tend to be more reasonable than credit card debt. So people are not borrowing a lot on their credit cards, only about a quarter of what they used to. But they are borrowing for auto loans, which means that people are renewing their cars. It's kind of a small show of optimism, that people at least will spend money to get around.
HOBSON: Now, banks are a big player in this. Obviously, if people are borrowing, then people are lending. Are banks behaving better this time, Heidi, than they did in the crisis leading up to 2008?
MOORE: Well, while the cat's away, the mice will play.
MOORE: And the government has been away, shall we say. So just this week, actually, we're going to see a return to a focus on too big to fail, whether these banks are, you know, too big to fail. They're taking on too much in loans. They don't have enough cash on their books. And the prediction of at least one analyst is that the government is going to expect the banks to keep more cash to cushion themselves when they take on these loans, to the tune of, you know, $20 billion each for some of the big banks. So that obviously bothers the banks. They'd rather have that money out in the market, you know, doing its work, but they're going to have to keep it aside in case they get into trouble or they fail. And it shows that there's a small and very weak push to get these banks to actually have to face up to lending standards, which right now, when things look good, we're not examining them for that, but we should be.
HOBSON: Heidi Moore, finance and economics editor for The Guardian, thanks so much.
MOORE: Thank you, Jeremy.
HOBSON: And up next, the view of events in Egypt from Minnesota. An Egyptian-American there says the democratically elected president should have been allowed to remain in office. We're back in one minute with that, HERE AND NOW. Transcript provided by NPR, Copyright NPR.