Who Pays What First? Debt Prioritization During The COVID Pandemic

from Liberty Street Economics

-- this post authored by William J. Arnesen, Jacob Conway, and Matthew Plosser

Since the depths of the Great Recession, household debt has increased from a low of $11 trillion in 2013 to more than $14 trillion in 2020 (see the New York Fed Household Debt and Credit Report). In this post, we examine how consumers’ repayment priorities have evolved over that time.

Specifically, we seek to answer the following question: When consumers repay some but not all of their loans, which types do they choose to keep paying, and which do they fall behind on?

We use data from the New York Fed’s Consumer Credit Panel to construct a “head-to-head conflict" among different types of debt. In other words, if a consumer chooses to repay all of their auto loans while defaulting on their consumer debt, that would constitute a “win" for auto loans over consumer debt. We then run a logistic regression to predict the overall strength of each debt type, focusing on three categories: auto loans, mortgages, and consumer debt (we have excluded student debt from the analysis because of substantial changes in repayment rules - such as the dramatic rise of income-based repayment plans - might make comparisons over the full twenty-year period difficult.

The chart below illustrates repayment prioritization over the last twenty years (because of the rise in mandatory and voluntary forbearance programs during the COVID pandemic, we exclude 2020 data). The y-axis represents the probability that a given form of debt will be repaid over consumer debt (which includes bank card, consumer finance, and retail trade debt) when a consumer must choose to fall behind on at least one form of debt. Two dominant patterns emerge. The first, as previously explored in a Liberty Street Economics blog post, is that mortgage prioritization collapsed during the 2008 financial crisis, before steadily climbing back to its previous peak in the last few years.

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Disclaimer: Conway’s contributions are based upon work supported by the National Science Foundation Graduate Research Fellowship Program under Grant No. DGE-1656518. Any opinions, ...

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