CHICAGO -

Charlie Wise acknowledged banks, credit unions and finance companies kept coming to him and his TransUnion colleagues asking about the risks associated with consumers — particularly millennials — holding student loan debt.

The volume of inquiries prompted TransUnion to examine the issue, and the project findings are “good news” for the auto finance market, according to Wise.

Despite an unprecedented rise in student-loan balances over the past decade, a new TransUnion study found that student loan obligations have not inhibited younger consumers’ ability to access and repay other consumer credit categories such as auto loans and mortgages when compared to their peers without student loans. Wise noted the conclusions are contrary to the popular belief that burgeoning student debt is hampering access to credit for young adults.

“This is good news, particularly for auto lenders,” Wise told SubPrime Auto Finance News in advance of the study release on Wednesday.

“Not only should they be not necessarily scared of millennials with student loans, but this is actually a credit hungry group. This people are more credit active than those without student loans. All things being equal, they actually perform better because there have lower delinquency rates,” continued Wise, co-author of the study and vice president in TransUnion’s Innovative Solutions Group.

“For those looking to grow and looking to particularly grow with a millennial population and a population, this is really good news. It allows you to identify and potentially go after that student loan cohort rather than worry or be concerned about lending to them,” Wise went on to say.

TransUnion determined consumers ages 18 to 29 with a student loan in repayment generally are able to gain access to new loans and perform as well or better on those new loans as similarly aged consumers without student loans. Furthermore, the study found that in only three to six years, student-loan consumers in their 20s have been observed to pass similarly aged consumers without a student loan in overall loan participation rates on mortgages, auto loans and credit cards.

The results from the study were revealed at TransUnion’s Financial Services Summit in Chicago, which included more than 275 senior-level financial services executives from across the globe.

“Going to school impacts young consumers' access to credit; while in school, students may be less likely to have a job and generate the income necessary for loan approval. However, most catch up once they leave school — and their ability to catch up has not changed over the past decade,” said Steve Chaouki, executive vice president and the head of TransUnion’s financial services business unit.

“Our study demonstrates that consumers in their 20s with student loans in repayment — that is, once they finish school — are in fact able to access credit at levels similar to or better than their peers who do not have student loans,” Chaouki added.

The study found that in the years after they start repaying student loans, those consumers have similar new mortgage activity to, and higher new auto and credit card open rates than, their peers without student debt.

Rapid Rise in Student Loans

Wise admitted the study’s findings may come as a surprise because of the rapid rise in student loan balances.

According to TransUnion data, the percentage of consumers ages 20 to 29 with a student loan has skyrocketed from 32 percent in 2005 to 52 percentat the end of 2014. In the last five years alone, student loan balances have increased from $589 billion in Q1 2010 to $1.1 trillion in Q1 2015.

The share of student loans in relation to other products such as mortgages, credit cards and auto loans as part of a the overall loan “wallet” for consumers ages 20-29 has also grown dramatically — increasing from 12.9 percent in 2005 to 36.8 percent in 2014, an increase of 186 percent.

“We wanted to do a study to answer that question because everyone seemed to have that opinion that student loans really are a burden on younger consumers,” Wise said. “If the answer is they’re right, it would be good to confirm that. If it’s not right, it would be good to cut through those misconceptions.”

Student Loan Study Background

TransUnion observed, on a depersonalized basis, borrowers with student loans who entered repayment from three different timeframes: Q4 2005, Q4 2009 and Q4 2012. Student loans generally enter repayment status six months after students graduate or otherwise end their studies.

In other words, students graduating in May or June usually begin to make payments on their student loans in the fourth quarter of the year in which they graduate.

The study looked at the performance of consumers ages 18 to 29 on mortgages, credit cards and auto loans in the 24 months following the beginning of their student loan repayment. These consumers were compared to control groups of similarly aged persons who had no student loans during those same time periods. The study also controlled for differences in credit-score distributions between the student loan and control groups, as well as age distribution.

“We looked at three distinct timeframes to get a better sense of the student loan picture,” Wise said.  “We believe most people would agree that 2005 was a ‘normal’ year, in that the economy was strong and credit was readily available to younger borrowers.

“In other words, it is fair to use 2005 as a baseline for comparison. Q4 2009 was in the immediate aftermath of the financial crisis, while Q4 2012 represented the most recent data available for observing trends over an ensuing two years,” he continued.

Delinquencies Lower, Participation Higher        

The results from the study showed that the changing economy and shifts in the ability to access consumer credit greatly impacted younger consumers overall, both those with a student loan and those without. The percentage of consumers ages 18 to 29 with credit products such as mortgages, credit card and auto loans dropped significantly between 2005 and 2012.

However, this drop impacted both consumers with student loans and those without similarly; the presence of a student loan in repayment did not appear to disproportionately impact consumers with student loans. Other macroeconomic factors, such as rising unemployment rates for younger consumers and tightening lending standards, were likely far larger contributors to decreased consumer credit originations and participation by all consumers in this age group.

“Participation rates for mortgages, credit cards and auto loans dropped significantly between the 2005-2007 and 2012-2014 timeframes — and impacted both consumers repaying student loans and those in the control group to a similar degree,” Wise said.

“However, just as we observed in 2005, student loan borrowers in 2012 generally left school with lower loan participation rates than their control counterparts, likely due to difficulty in accessing credit while a student with little or no income,” he continued.

“Over the next two years, student loan borrowers were actually more credit active in opening new auto and credit cards, enabling them to close this gap. Further, we saw the rate of new mortgage originations nearly identical between the student loan and control groups, keeping the mortgage gap constant — the same thing we saw in the 2005 cohort,” Wise went on to say.

“Even the immense growth in student loan balances does not appear to be driving any different impact on new credit access today than what we saw a decade ago,” he added.

In addition, results from the study show that consumers ages 18 to 29 with a student loan in repayment generally had better performance on new accounts than their peers without student loans.

For instance, those consumers with a student loan entering repayment at the end of 2012 had a 15 percent lower 60-day delinquency rate on newly opened auto loans by the end of 2014 than those consumers without a student loan in the same cohort.

Over that same timeframe, student loan borrowers also had a 1 percent lower 60-day delinquency rate on new credit cards than the control group.

“This is an important finding, because it 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,” Wise said.

“Lenders looking to attract and maintain relationships with millennials should find this news encouraging,” he added.

Convergence Point

The study also looked over longer timeframes to find if and when consumers with student loans in repayment caught up with the control group in terms of new loan participation and originations.

“Student borrowers often leave school with fewer consumer loan products than their peers who do not have student debt. But once they graduate, they immediately begin to catch up to their peers,” Wise said.

For the 2005 group, TransUnion found that this convergence in loan participation occurred after two years for auto loans, after which point the student loan group had a higher percentage of auto loans. The convergence timeline took six years for mortgages. 

Even with elevated student-loan debt levels and coming off a devastating recession, convergence timeframes did not increase dramatically for the 2009 cohort.

For auto loans, the convergence timeframe increased to three years, primarily due to the fact that student loan borrowers left school in 2009 with a larger gap compared to the control group than they did in 2005, but they were able to close this gap through higher new auto loan originations.

For mortgages, the 2009 student loan group was 1 percent behind the control group after five years and on track to reach convergence after six years—the same convergence timeframe as observed in 2005.

“Despite having thousands of dollars more in average student-loan debt in more recent years, our study clearly shows that student-loan borrowers in repayment continue to catch up to the control group — those without a student loan — in a relatively short period, due to their higher new loan origination rates,” Wise said.

“This is an especially important finding, because it shows the dramatic rise in student loan balances has not materially impacted younger consumers in gaining access to mortgages, auto loans or credit cards, or in their ability to successfully manage their new credit obligations,” he went on to say.

For more detailed information about the TransUnion Student Loan study, visit http://transunioninsights.com/studentloans.