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Financial Planning > College Planning > Student Loan Debt

Debt of Older Americans Surges: New York Fed

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Financial planners generally agree that getting rid of debt should be a top priority for retirees, and this is especially true in the current low investment return environment. With long-term bond yields in the low single digits and a stock market that’s expected to post at most modest gains this year, any debt costing more than those yields or profits — such as debt on credit cards, which typically charge between 10% and 20% interest — will create a loss.

But according to a new report, older Americans are holding more debt now than in the past. The Federal Reserve Bank of New York reports that debt held by borrowers age 50 to 80 has increased 60% since 2003, while debt held by younger borrowers has declined modestly. Moreover, it notes that “debt per capita is substantially more at age 65 and beyond.”

Between 2003 and 2015, debt for seniors has more than doubled, increasing between 120% and 170%, according to the New York Fed report “The Graying of American Debt.” Older Americans have increased their borrowings in nearly all types of debt, including mortgages, home equity lines of credit, credit cards and auto loans. In comparison, debt for Americans age 25 to 30 has fallen between 5% and 25% during the same period.

Some of the increase in debt for older Americans can be explained by the aging of the population but not nearly all. The Fed reports that roughly 50% or more of the increase in debt among those 65 or older is unrelated to that demographic fact.  

So why is debt among older Americans increasing?

New York Fed economists offer two primary explanations:

First, tighter lending standards following the Great Recession favor older borrowers who tend to have higher credit scores. The median score for borrowers 65 and older is 750 and higher – higher than any other age group starting at age 25, according to the Fed report. (The median credit score is under 700 for those under 45 and near 700 for those 45 to 55). 

In the case of new auto loans, the average age of borrowers shifted away from younger borrowers to older ones.

Second, a credit boom before the Great Recession that was followed by a decline in new loans as a result of tighter lending standards. Since new potential borrowers have little opportunity to take out loans, the mix of borrowers shift toward older Americans.

In the case of mortgages, originations for all borrowers fell, but they declined the least among older Americans. (They declined the most for middle-aged borrowers, down at least 60%, but younger borrowers, too, have difficulty taking out new loans because of higher student debt levels and because some are back home living with their parents.)

The graying of American debt could have a mixed impact on the economy, according to the Fed economists. It’s good for the “stability of outstanding consumer loans” but not for consumer-led growth, which underpins the U.S. economy, because of the lack of younger borrowers.

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