Excessive student loan debt drains economic engine

May 10, 2013 by

While a college degree can be a key to the American dream, for many Americans, unmanageable student debt has turned into a nightmare. There appears to be growing consensus that unmanageable debt burdens are not just a problem for individual borrowers but for all of us.

While many in Washington are focused on what loans look like for future borrowers, there may be a domino effect on the broader economy if we ignore borrowers currently stuck with high student loan payments.

Since the Consumer Financial Protection Bureau highlighted a year ago that student debt had surpassed the $1 trillion threshold, others have warned about the impact on the broader economy. Last year, the Treasury Department’s Office of Financial Research described how student debt might impact demand for mortgage credit. The Federal Reserve Board’s open market committee discussed whether student debt is impacting household spending. And just a few weeks ago, the Financial Stability Oversight Council discussion of student debt in its annual report added to the chorus.

In February, we asked the public to tell us about potential policy options to tackle the problem of unmanageable student debt — particularly private student loans, a market that boomed in the years leading to the financial crisis. We received more than 28,000 submissions from experts and individuals. We heard that high student debt levels might impact everything from homeownership to health care.

First, we heard that unmanageable student debt impacts homeownership and household formation. The National Association of Home Builders wrote to the CFPB about the relatively low share of first-time home buyers in the market compared with historical levels, and that student debt can “impair the ability of recent college graduates to qualify for a loan.” When monthly student loan payments are a high portion of income, applicants may be less qualified candidates for a mortgage.

The National Association of Realtors wrote in its submission that first-time home buyers typically rely heavily on savings to fund down payments. When young workers are putting big chunks of their income toward student loan payments, they’re less able to stash extra cash for that first down payment.

Other submissions cited research that showed three-quarters of the overall shortfall in household formation can be attributed to reductions among younger adults ages 18 to 34. In 2011, 2 million more Americans in this age group lived with their parents than in 2007. Moody’s Analytics estimates that each new household formed leads to $145,000 of economic impact.

via Excessive student loan debt drains economic engine – Rohit Chopra – POLITICO.com.

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