The economic consequences of student debt
The Federal Reserve Bank of New York is out with new research (“Young Student Loan Borrowers Retreat from Housing and Auto Markets”) showing that student debt is not merely painful to those owing it, but has also become economically damaging. The debt service burden is essentially neutralizing, or worse, the income advantage of having earned a bachelor’s degree or more, at least as measured by the ability to buy a house or a car.
Over the last decade, the share of 25-year-olds with student debt has risen from about 25% in 2003 to 43% in 2012, and their average debt burden has nearly doubled, from $10,649 in 2003 to $20,326 in 2012. At first this seemed to have few economic consequences; from 2003 to 2009, the homeownership rate of people with student debt was significantly higher than that of those without student debt—which isn’t surprising, given the income premium still enjoyed by those with education after high school. That changed during the Great Recession, as homeownership rates fell across the board. But those for student debtors fell harder than others, and as of 2012, the homeownership rate of those with student debt was lower than those without.
Something similar is true of car ownership: a higher proportion of those with student debt have historically borrowed to buy new or late-model used cars than those without student debt. That changed during the recession too. Now the rates are about the same.
It looks like student debt is replacing other kinds. Despite the rise in the student debt burden, the overall indebtedness of those still paying for their degrees has declined, meaning that they’ve pulled back markedly from more traditional forms of borrowing. This is, the New York Fed researchers conclude, probably the result of joint decisions by both borrowers and lenders. Student debtors have probably concluded that their future earning prospects are pretty crummy, and that paying down their loans will claim a painfully large chunk of their income. Why add to the problem by borrowing more to buy a house or a car? And lenders are no doubt spooked by all that lingering education debt (especially given high and rising delinquency rates). Credit scores of those with and without student debt were once pretty similar, but they diverged around 2008. As of last year, the average Equifax credit score for a 30-year-old with student debt was 24 points below the average for those without student debt; for 25-year-olds, the difference was 15 points. And that’s despite the theoretically greater earnings potential for the degreed.
Car sales have recovered since the recession lows, but they remain well below their long-term trend. And the recovery from the housing bust has been very weak. Weakness in both these markets, especially housing, has been a major drag since the economy officially bottomed out in 2009.
It’s nice to imagine an economy where the purchase of cars and houses using gobs of borrowed money would be less central to material well-being, but we’re a long way from that. It looks like student debt, aside from being a miserable burden on those paying it, is harming the broad economy, and will continue to for years to come.
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Man, what perfect timing. I’m currently enrolled in a grad school program and as part of the federal requirements for borrowing you have to fill out an “exit loan counseling” online form. You’re shown how much you have borrowed (over 100k in my case, I know that’s actually an outlier in terms of the national statistics, but I know many people who have much more than I do!), and have to answer a bunch of questions about your legal rights and responsibilities. It was a depressing and frightening thing, but as I filled it out one tiny, ironic, perverse silver lining entered my head: I now have an excellent excuse for not participating in one two of the most dangerous and stupid aspects of American culture: 1) the car, and 2) the privately owned home in Suburbia.
I’ll never qualify for a car loan, and couldn’t afford one even if I did. Obviously buying a car outright is out of the question, because even if I could afford a cheaper used car I couldn’t afford the upkeep/repair that would be required for it (and of course living in central Brooklyn I’d have no place to park it.)
Home loans are out of the question, despite my excellent credit, because I have essentially taken out a small mortgage on my own brainpower. No amount of peer pressure, cultural baggage, or parent’s influence will ever push me into buying a home, because I won’t be able to do so for at least 10 years. This is liberating!
On your show you’ve gone over the horrors of Suburbia and the car culture that enables it: now, millions of millennials will be shut out of both, whether they like it or not. And maybe, in the long run, that’s a good thing!
How is pouring money down the drain renting better than buying?
I was admitted into a PhD program but didn’t attend because it meant $50,000 + in debt. The stipends are awful and stipulate you can’t get extra work, which as a musician would have been easy and not time consuming. And student housing isn’t subsidized anymore, and public transportation non-existent in this area.
The school wasn’t too concerned. Another rich kid from overseas can take my slot and they can make money off of it. US higher education is paying its bills from the children of the international elite. And strangely it can be claimed to add to campus diversity, as liberals define it.
Meanwhile the underclass in the U.S. will only grow and grow.
Jon,
Owning a home is more expensive then renting if real estate prices are declining or flat. Plus, it ties you down in a weak employment market.The maintenance on a house probably adds another 30 % onto your mortgage each month alone, conservatively. Ever replace a water heater or air conditioner ? Never mind a foundation or new roof.
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