May 19, 2024

Pace of Consumer Borrowing Rose in May

Americans stepped up their borrowing by $19.6 billion in May compared with April, the Federal Reserve said on Monday in its monthly report on consumer credit. That was the biggest jump since a $19.9 billion rise in May 2012.

Total borrowing reached a record $2.84 trillion.

The category that includes credit card use rose $6.6 billion, also the largest gain in a year. Credit card debt reached $847.1 billion, the most since September 2010. Credit card debt remains about 16 percent below its high of $1.02 trillion in July 2008 — just before the financial crisis erupted.

Borrowing for autos and student loans rose $13 billion in May. That was the sharpest increase since February. This category of borrowing has been rising especially fast, driven by loans to pay for college.

The Fed’s consumer credit report does not separate student loans from auto loans. But data from the Federal Reserve Bank of New York shows that student loan debt has been the biggest driver of borrowing since the recession officially ended. In part, that is because some unemployed Americans have returned to school for training in hopes of landing a job.

Despite the increase in credit card debt in May, consumers are not likely to raise their card use to prerecession levels, said Cooper Howes, an economist at Barclays Research. “We expect the trends of student loan-driven expansion,” Mr. Howes said, “and only small changes in revolving credit to continue in coming months.”

The measure of credit card debt in the Fed’s report has risen $15.8 billion this year. That compares with annual increases from $25 billion to $50 billion in credit card debt before the recession, which officially began in December 2007 and ended in June 2009.

Consumers increased their spending from January through March but reduced the pace of their savings to finance it. After-tax income dropped in the first quarter.

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DealBook: British Authorities to Announce Changes in Libor Oversight

Martin Wheatley of the Financial Services Authority will outline plans to overhaul Libor on Friday.Simon Newman/ReutersMartin Wheatley of the Financial Services Authority will outline plans to overhaul Libor on Friday.

LONDON — British authorities are set to announce significant changes to the interest rate at the heart of a recent manipulation scandal as they aim to improve the accuracy and reliability of the benchmark.

On Friday, Martin Wheatley, the managing director of Britain’s Financial Services Authority, will outline plans to increase oversight of the rate-setting process, which underpins more than $350 trillion of financial products like mortgages and student loans.

As part of that effort, regulators are stripping the British banking group that currently oversees the interest rate — the London interbank offered rate, or Libor — of its power. The British government, in turn, will take a more hands-on role, including making rate manipulation a criminal offense.

The benchmark itself will also be retooled to address some of its inherent weaknesses. The goal is to base Libor, which measures the rate at which banks lend to each other, on actual market transactions, rather than estimates.

“The disturbing events we have uncovered in the manipulation of Libor have severely damaged our confidence and our trust,” Mr. Wheatley says in an advance text of the remarks he is to deliver in London. “It has torn the very fabric that our financial system is built on.”

Libor Explained

The scrutiny of Libor has intensified this year as authorities around the globe have ramped up their investigation into rate-rigging at more than a dozen big banks. Regulators are concerned that the institutions, including HSBC, Deutsche Bank and JPMorgan Chase, submitted false rates.

In June, the British bank Barclays agreed to pay $450 million to settle charges that employees manipulated the rate to increase profits and make the institution appear healthier. Several top officials, including the chief executive, Robert E. Diamond Jr., resigned as a result of the scandal.

“Libor needs to reflect the values of the market,” said David E. Kovel, a partner at the law firm Kirby McInerney who is representing clients in a potential class-action suit related to Libor. “There’s no doubt the way that the rate is set up now makes it susceptible to abuse.”

The changes to Libor, some of which may require changes to British law, are expected to be introduced over the next 12 months.

The Financial Conduct Authority, a new British regulator that will become part of the Bank of England, the country’s central bank, will have primary responsibility for regulating Libor. Mr. Wheatley of the Financial Services Authority will lead the new agency when it is created next year.

“We can’t allow the unfettered latitude that banks previously enjoyed,” Mr. Wheatley’s advance text says. “Much greater rigor and transparency must be introduced.”

Under the proposal, regulators will pare back the number of currencies and maturities included in the Libor system. Critics have questioned the accuracy of Libor, given the lack of actual bank lending transactions, particularly in smaller currencies like the Swedish krona.

To improve the system, five of the current 10 currencies, including the Canadian dollar, will be phased out over the next year. Instead, Libor will focus mainly on major currencies like the United States dollar and the euro. In all, regulators are looking to cut the number of Libor rates to 20, from 150.

Individual banks’ rate submissions will be delayed by three months, rather than released in real time. This change means Libor will not readily reflect a bank’s health, potentially eliminating a motivation to submit false rates.

If a bank reports a high rate, it can be a sign of underlying troubles at the firm. During the financial crisis, Barclays submitted artificially low rates to deflect concerns about its financial position, according to regulatory documents.

Despite the changes, analysts worry that Libor may still be easy to manipulate. Since the financial crisis, banks have not been willing to take the risk of lending to other institutions. In their proposal, regulators indicate that the process will still rely on some “level of judgment” when hard data are not available.

“There are few markets where there’s a significant amount of liquidity,” said Darrell Duffie, a finance professor at Stanford University. “It makes sense to prune down the number of maturities.”

The British government will also replace the British Bankers’ Association, the London-based trade group, as Libor’s overseer. The organization, which established the benchmark rate in 1986, has come under mounting criticism for failing to catch the manipulation, which dated back to at least 2007, according to regulatory filings.

Under the proposed changes, a new administrator will be selected in the next 12 months. The future role of the data provider Thomson Reuters, which currently collects the daily rate submissions on behalf of the trade association, is uncertain.

“British Bankers’ Association clearly failed to properly oversee the Libor setting process and should take no further role in the administration and governance of Libor,” Mr. Wheatley’s advance text says.

He will also take aim at the excesses within the financial services sector that led to the manipulation of Libor, arguing that traders at many of the world’s largest banks were too focused on securing large bonuses. “Libor needs to get back to doing what it is supposed to do,” the text says, “rather than what unscrupulous traders and individuals in banks wanted it to do.”

Prepared Remarks From Martin Wheatley

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Bucks Blog: Why Consumers May Not Win Much From Latest Fed Action

September 14

Answers to Your Questions About Student Loans, Part 3

Answers to questions about consolidating loans, paying late fees, loan forgiveness for public service, and declaring bankruptcy.

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Degrees of Debt: Answers to Your Questions About Student Loans, Part 3

This week, two New York Times reporters and Geoffry Walsh, an expert on student debt and bankruptcy at the National Consumer Law Center, are answering questions about ways to avoid default, pay off student loans or try to expunge student loans through bankruptcy court. Along with questions, some readers proposed their own answers. The first set of answers is here, the second is here, and the third set is below.

The reporters, Ron Lieber and Andrew Martin, recently wrote articles about the difficulties of paying back student loans as part of The New York Times’s series Degrees of Debt, which examines the implications of soaring college costs and the indebtedness of students and their families.

I have a few different loans under both my name and my mom’s name and one under both of ours with Massachusetts Educational Financing Authority. The rest are federal direct loans and Parent Plus. How can I consolidate them all under my name? What would you recommend me do to lower my monthly payments? I’m paying about $1,500 a month. Bruno Elqker

: Bruno, first of all, my condolences on your monthly payment. $1,500? Ouch. That’s a mortgage payment on a nice home in many parts of the country, though unfortunately not in suburban New Jersey. But I digress. According to Mark Kantrowitz, publisher of, a Web site devoted to college financial aid, you cannot consolidate federal loans that have different borrowers, even if one of them is your mom. (It may be possible, however, with private loans depending on the credit scores of you and your mom). To get a lower monthly payment, you might consider income-based repayment for your federal loans and obtaining a longer repayment term on your private loans.

My federal loan is now in the hands of a private company, Aspire. Will Aspire raise my rates? Can they raise my rates? And how is it possible that the liberty could be taken to transfer a loan to a private company without my knowledge or consent? Amanda Jones

The federal government employs private firms and nonprofits like Aspire to manage student loans day to day, and it is perfectly legal for them to do so. Those firms, however, cannot change the terms of the loan after it has been transferred to them unless it has a variable rate, which is highly unlikely for a federal loan.

I have two consolidated loans, both at high interests. One from 20 years ago and another from 11 years ago. Is there any way to get the interest lower and more in line with today’s rates? Or is there ever a window when the life of the loans will expire? I’ve paid back my education several times over at this point. Laurie Matthews

Laurie, I hope you got a killer education considering how long you have been paying on those loans. Having said that, you can try to consolidate your loans again, though that will not bring down the interest rates since it is a weighted average of your current loans. You may want to consider trying to obtain a home equity loan at a lower rate and then paying off your student loans. Or, if they are federally guaranteed loans, you may be eligible for income-based repayment, which will reduce your monthly payments.

After multiple deferments, I can no longer delay on repayment — I cannot afford even the income-based reduced payment. I’ve fallen behind on payments and each month incur more and higher late fees. A Sallie Mae representative’s suggestion was to basically bite the bullet and make a huge payment (which I don’t have the funds to do). Any suggestions on getting Sallie Mae to work with people who are actively trying to repay? Are these inflated late fees really legal? No doubt they are, but man — Sallie Mae is not shy about applying them! Rebecca Smallman Ellis

Since you refer to income-based repayment, it sounds like you are referring to federal student loans. If that’s the case, income-based repayment is set up so that you pay just 15 percent of your discretionary income, which tends to be a relatively small amount. If the problem isn’t so much your student loans but other bills, you may want to consider credit counseling. The Department of Education also has an ombudsman who may be able to provide some guidance.

What happens to your student loans if you are diagnosed with a terminal condition? My job prospects are slim to none with my current state of health. Thank you. Angela Bekzadian-Avila

There is a disability discharge for federal loans, so it will require a doctor to certify that you are permanently disabled and with a condition that prevents you from working or is expected to result in death. Some private lenders offer disability discharges as well.

If your private student loans were taken over by a collection agency, is it possible to declare bankruptcy on them? Also, what are the options for reducing federal student loans? The cost of education in our country has become absurd. Nicole Kt

As I stated previously, you cannot discharge student loans in bankruptcy without submitting a separate petition to the court, whether they are private or federal loans. It doesn’t make a difference that a debt collection agency is involved. If you have enough money to make a lump-sum payment, you may be able to get a reduction on the balance of your federal loans, Mr. Kantrowitz said.

I consolidated all of my student loans with the government and am now enrolled in income-based repayment. Every month I accumulate twice as much interest as the monthly payment I make. However, I have been told that if I pay on time each month while I work for full time for a nonprofit organization for 10 years, all will be forgiven at that 10-year point through the public service loan forgiveness program. My question: How can I ensure that my loans will be forgiven after 10 years of paying on time? I currently work full time for a nonprofit org, and pay my income-based payments on time. I plan to do both of these for 10 years, but am concerned that there are no guarantees my loans will be forgiven and the interest will have doubled my balance at that point. Carrie Hott

Carrie, I would suggest you check to make sure your employer qualifies for the public service loan forgiveness program. You can do so by going on and filling out an employment certification form.

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Bucks Blog: An Update on a Student Debt Case

Doug Wallace is trying to persuade a federal bankruptcy judge to discharge his student loans.Ty William Wright for The New York Times Doug Wallace is trying to persuade a federal bankruptcy judge to discharge his student loans.

In an article about what happens to people who try to get a judge to discharge their student loans in bankruptcy court, I told the story of Doug Wallace, a blind man in Ohio in the middle of his own case. He’s trying to prove that paying his debt would cause an “undue hardship,” according to the governing legal standard. To do so, he needs to prove, among other things, that there is a “certainty of hopelessness” that he will be unable to pay his debt during the term of the loans.

Last week, he had his latest hearing in front of C. Kathryn Preston, the federal bankruptcy judge overseeing his case. She set Jan. 28, 2013, as the date for a new mini-trial to discuss medical issues that have arisen (including a hernia and problems with his fingers) in the last two years. He’ll also have to discuss whether he has made any effort to find work or attempted to get any additional assessment of whether he’s employable.

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Bucks Blog: A Tool for Those Who Fall Behind on Student Debt

Have you fallen behind on your student loan payments? The Consumer Financial Protection Bureau this summer introduced an online tool to help you evaluate your options.

The “Student Loan Debt Collection Assistant” asks a series of questions to help you determine what steps to take if you’ve missed payments or think you may in the future. It starts by asking if you have federal loans — like a Perkins or Stafford loan — or private loans. (If you aren’t sure, the site has a link to the National Student Loan Data System, where you can find the answer). Federal loans generally have more protections for borrowers who fall behind on payments.

If you’ve missed payments already, the tool advises you to contact your loan servicer — the company that collects and keeps track of your payments — to see what can be done to avoid going into default.

If you have federal loans, for instance, you should ask your servicer about alternative payment arrangements, like income-based repayment plans, which may significantly lower your monthly payment.

Fewer protections are available on private loans. In some cases, you can be considered in default if you miss just two payments.

The site says that even if you are in default on a private loan, you have rights. For example, debt collectors attempting to obtain payment of a private student loan cannot garnish your wages without a court order, or seize your federal or state tax refund.

Take a look at the tool and let us know what you think. Have you fallen behind on your student loans? What steps did you take?

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DealBook: Deutsche Bank Blames Weak Euro for Drop in Second-Quarter Profit

Deutsche Bank named Anshu Jain, left, and Jürgen Fitschen as future co-chiefs.ReutersDeutsche Bank’s co-chief executives are Anshu Jain, left, and Jürgen Fitschen.

FRANKFURT — Deutsche Bank, Germany’s largest lender, said on Tuesday that earnings plunged more than expected in the second quarter after a weak euro led to an increase in operating costs in the United States and Britain.

Profit fell more than 40 percent to 700 million euros, or $844 million, the bank said in a preliminary release that offered little detail. The bank’s operating expenses not counting interest rose 5 percent from a year earlier, to 6.6 billion euros.

The increase in costs “is mainly a result of the bank’s U.S. dollar and pound sterling cost base being negatively affected by the weakening of the euro,” the bank said. The euro was trading at slightly more than $1.20 Tuesday, near a two-year low.

The preliminary earnings report demonstrates the challenges facing Anshu Jain and Jürgen Fitschen, who took over in May as co-chief executives of the bank, replacing Josef Ackermann, who retired. Deutsche Bank shares fell 2.1 percent Tuesday to close at $28.17 in New York.

In past quarters, Deutsche Bank had lower trading revenue as its clients stayed away from financial markets hurt by the euro zone debt crisis. The bank said that revenue in the second quarter fell to 8 billion euros from 8.5 billion euros a year earlier.

Deutsche Bank is among the institutions under scrutiny by authorities in connection with manipulation of Libor, the London interbank offered rate, a benchmark used to help determine the borrowing rates for $750 trillion worth of financial products, including student loans and mortgages.

After a rival, Barclays, agreed in June to pay $450 million to resolve accusations against it by American and British authorities, there had been speculation that Deutsche Bank would set aside money to cover a possible settlement. But the bank did not mention the Libor investigation in its one-page statement Tuesday.

Nor did it address speculation that it planned large cuts in its investment banking unit, previously run by Mr. Jain. The bank said only that it planned to reduce its level of risk to help restore profit.

Deutsche Bank said it set aside 400 million euros in the quarter to cover possible bad loans, down from 464 million euros a year earlier. Profit before taxes was about 1 billion euros, down from 1.8 billion euros, the bank said.
It said it would provide precise figures and more details about the quarter on July 31.

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Security Firm Offers to Replace Tokens After Attack

Opinion »

Reining In For-Profit Colleges

Should regulators cut off student loans for “career” colleges whose graduates can’t pay back their debt?

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Geithner Warns Against ‘Race to the Bottom’

Opinion »

Reining In For-Profit Colleges

Should regulators cut off student loans for ‘career’ colleges whose graduates can’t pay back their debt?

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Bucks: Tuesday Reading: Student Loans Outpace Credit Card Debt

April 12

Tuesday Reading: Student Loans Outpace Credit Card Debt

Students take on more college debt, gas is topping $4 a gallon, a cheaper Kindle thanks to ads and other consumer-focused news from The New York Times.

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