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Student Loan Debt Bomb’s Collateral Damage

Posted by Larry Doyle on February 28, 2012 6:46 AM |

The cost of college and the accompanying burden of student loan payments are having an enormous impact across many segments of our economic landscape.

From basic consumer spending habits to decisions on living arrangements and so much more, recent college grads are facing a decidedly different economic future than their counterparts a decade or two ago.

I ask once again, Are Student Loans an Impending Bubble? Is Higher Education a Scam?

Many people in the field do forecast an impending student loan debt bomb. Why should we be concerned? For the very simple reason that the bomb is ENORMOUS!!

As US News recently highlighted, Are Student Loans the Next Debt Bomb?:

Total student loan debt has surged to more than $1 trillion over the past few years and with it the number of people seeking help handling their debt. More than 80 percent of bankruptcy attorneys surveyed by the National Association of Consumer Bankruptcy Attorneys reported a “major” jump in student loan borrowers seeking help, according to a study released Tuesday.

“Take it from those of us on the frontline of economic distress in America: This could very well be the next debt bomb for the U.S. economy,” said NACBA president William Brewer. “What we are worried about is that we are looking at the next mortgage-style debt threat to the United States.”

Many economic prognosticators forecast a huge and excruciating pop in the student loan bubble in the very near future.

What very important sector of our economy is already suffering collateral damage from the student loan debt bomb which has not fully detonated? Bloomberg Businessweek provides a fascinating review of how home sales for young professionals have been severely impacted by the weight of student loans. Let’s navigate and appreciate the voluminous details provided in the review, Student Debt Is Stifling Home Sales:

Roshell Schenck has a Ph.D. in pharmacy and earns $125,000 a year. Yet, because she has more than $110,000 in student loan debt, counselors have told her she can’t qualify for a mortgage. “I’d love to buy and can afford to buy,” says the 28-year-old graduate of Lake Erie College of Osteopathic Medicine in Erie, Pa. With lenders scrutinizing college loans more closely than in previous years, it’s almost impossible for borrowers such as Schenck to get approved for mortgages. “My debt is crushing my chances of purchasing a home.”

Last year outstanding education debt passed credit-card debt for the first time, according to Mark Kantrowitz, publisher of FinAid.org, a student loan website. Totaling close to $1 trillion, America’s mounting pile of outstanding student debt is a growing drag on the housing recovery, keeping first-time home buyers on the sidelines and limiting the effectiveness of record-low interest rates.

According to a recent Federal Reserve study, only 9 percent of 29- to 34-year-olds got a first-time mortgage from 2009 to 2011, compared with 17 percent 10 years earlier. “First-time home buyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly,” Fed Chairman Ben Bernanke said at a homebuilders’ conference in Orlando on Feb. 10.

Recent college graduates carry an average debt load of more than $25,000, limiting their ability to qualify for mortgages even if they’re able to land a job in a market with an unemployment rate of 9 percent for 25- to 34-year-olds. Dubbing it a “student loan debt bomb,” the National Association of Consumer Bankruptcy Attorneys (NACBA) warned on Feb. 7 about the effects of rising student debt on recent graduates, parents who co-signed their loans, and older Americans who’ve gone back to school for job training.

“Just as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and renders them unable to engage in consumer spending that sustains the economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future,” John Rao, vice president of the NACBA, said on a conference call.

Although housing prices have fallen by about one-third from their 2006 peak, young adults who are starting to move out of their parents’ houses want to rent, not buy. While single-family housing starts posted their worst year since 1963 last year, multifamily housing construction has surged as more Americans rent.

The housing market does present some attractive opportunities. That said, the burdens of lessened job opportunities and consumer debt continues to weigh heavy on housing. The student debt bomb specifically will inhibit a quick rebound in housing and so much more.

For more on this topic, please read Sense on Cents/Student Loans.

Navigate accordingly.

Larry Doyle

Isn’t it time to  subscribe to all my work via e-mailRSS feed, on Twitteror FacebookDo your friends, family, and colleagues a favor and get them to do the same. Thanks!!

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.

  • Olivia

    I am concerned about the first quote from Ms. Shenck, “I’d love to buy and can afford to buy.” This is an example of what I believe is an increasing problem in our culture: seeing debt as a separate issue from personal finance. She cannot “afford to buy” with $110,000 in student loans. The government’s reckless deficit spending is setting a bad tone that is clearly impacting the debt mentality of the country at a personal level.

  • RJB

    Roshell represents the current wave of “entitled” grads who just do not fully “get it”. She “thinks” she can afford a home – and likely feels she she deserves a home too – due to her high current income but she what fails to acknowledge is that she already has a “mortgage” in the form of her student debt of >$100k. Her “debt is crushing her chances of buying a home” – ya think? She is very fortunate to have been able to get such a large amount of $ to fund and excellent education. Now comes the “other side of the coin” in that she has to pay her debt off BEFORE she can buy a home. She should be thankful for her education, work to pay down her debt and then pursue buying a home.

  • fred

    LD,

    Never fear it’s an election year. Although student loan debt continues to rise, it’s just a matter of time before the Administration convinces regulators and banks to classify it as goodwill rather than debt. Afterall, graduates have a much higher earning potential that will amortize over their lifetime, don’t they?

    As goodwill student loan debt can then qualify for exclusion from the mortgage debt calculation. If banks balk at the idea, just slap a gov’t guarantee on the mortgage and ‘voila’, the banks will certainly go along.

    We can even go a step further and allow potential homeowners to add their outstanding student loan balances to the purchase price of their new home so they can then amortize all their debt over 30 years rather than a shorter period.

    Wall St can then package these MBS as AAA (with the gov’t gtd and the power of diversification). Global banks can then purchase the MBS as a higher return no risk alternative to U.S. Treasuries.

    If things don’t work out no worries, the Fed can just do swaps at par and bury the MBS on their balance sheet where they can be hidden from regulators and avoid GAAP valuation principles.

    LD, it’s a ‘no brainer’, a ‘win-win’ for all parties involved! I just can’t believe that no one thought of it before?

    • Andrew

      Great idea! Jon Corzine can be the mouthpiece.

  • Obsvr-1

    Although a $1T is no small amount of debt, it is dwarfed by the housing debt.
    1. Student loans can not be discharged in bankruptcy – I am sure a left over from the banking lobby efforts when these loans were held by the finance sector instead of the US Gov’t.
    2. Homes can be foreclosed, assets back the loan, so the impact while very large still leaves an asset with value. Notwithstanding the $1T or so of HELOC which are likely underwater and effectively unsecured.

    So while SL debt looks like a bubble, or in fact may be a bubble, the probability of a burst like the housing bubble is not likely. As the gov’t is backing the debt, there is a lifetime of time on the repayment which allows for a very long avenue to kick the can.

    SLs are more like an anchor, as the article points out the money used to pay down the debt is not making its way into the economy for consumption, having a deflationary effect as the debt is extinguished.

    Perhaps a solution would be to have the universities and other educational institutions be mandated to hold a percentage of the loan – the proverbial skin in the game – to influence a better outcome for all of the Educational Spend and reduce the “churn and burn” behaviors.

  • coe

    LD – This issue has many “unintended consequences”…in addition to being a US issue, I believe you will find it a global issue with the relatively recent surge in the demographics of non-US students attending college…I also think it has a huge impact on family life, in that many of these students shouldering this massive debt burden are tending to live at home with their parents rather than buy or even rent a place of their own…perhaps this is a good thing in terms of a quaint notion of a return to earlier times when multiple generations shared the same home – but it puts a strain on the parents and probably extends their working days to help support their children for a longer period of time. Let’s also not miss the point of the reason for the debt – i.e. the unconscionable cost of higher education…talk about inflated costs where there is little accompanying relative value…no wonder many universities pursue misplaced priorities in questionable pusuit of athletic grandeur – it’s all about the money! I like the idea of “skin in the game”. And my more revolutionary idea would be to develop a broader solution in using the lower costing community colleges as a feeder/maturation process for the first two years – these colleges have improved their academic offerings, they tend to be local (i.e. commuter schools) and so a high school graduate can live at home and conceivably work for a few years before heading off to specialize in their junior and senior years…it certainly would lower the aggregate and individual debt burden…and I think the finished product might even be better! What do you think, LD?

    • LD

      Coe,

      All very salient points. Market forces are definitely at work across many segments of our economic landscape due to this sizable and growing student debt bomb.

      I was having a conversation with an educator just yesterday over the relative merits and value of some of the colleges and universities in our nation. How do we get “short” some of these outfits? Boy now that is an idea. Instead of a 529 Plan to fund college education, perhaps we can develop a futures index on select institutions and start to trade them.

      Let’s be kind here but for example “where would Podunk Private U” trade for example?

      Do any of our readers want to submit names of colleges and universities that are “great shorts’ and then let’s call their Treasurer and inquire if we can ‘short them’. Perhaps the best execution, no pun intended, would be to buy some long dated way out of the money puts on some of them.

      Come on, folks, who are we shorting in this universe?

      Coe….you are always great for stimulating great ideas. Love the way you think!!

    • JP

      Coe,
      Two points:
      In my time (70′s grad) young adults did not boomerang. Boomerangs then, were deadbeats. Young adults were not adult dependent children. (The term is an oxymoron, if ever there was one.)
      Point two:
      We left, never to return…off to earn our own. All to the good. What happens when massive amounts of young adults return to tap into parental resources? Those resources supply what an economy fails to provide.
      Future generations will return home to tap into…..exactly what? Will parental resources even exist, to pick up the tab?






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