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The Next Recession, Brought to You by Student Loans


The student debt crisis isn’t just a problem for students; it could depress the whole economy. That’s the upshot of the new comments the Center for American Progress submitted to the Consumer Financial Protection Bureau.

Student debt has risen to a frightening $1 trillion, and New York’s Federal Reserve Bank has reported that almost 30 percent of all student loans are delinquent, excluding borrowers not in repayment. The ripple effects of all this debt could be very ugly. In the first place, rising student debt combined with wage stagnation is delaying household formation:

 Two million more adults ages 18 to 34 live in a household headed by their parents than before the recession, an increase from 28.2 percent in 2007 to 31 percent in 2011. Moody’s Analytics estimates that each new household leads to $145,000 of economic activity, suggesting that this delay in household formation could be slowing broader economic growth.

The CAP argues, moreover, that even young adults who want to take on mortgage debt could be prevented from doing so by new regulations on mortgage lending and debt:

Due to the implementation of new mortgage regulations under the Dodd-Frank Act, lenders are often requiring that homeowners have a 43 percent “back end” debt-to-income ratio to get a loan. In other words, combined monthly housing costs and monthly debt payments must not exceed 43 percent of one’s monthly income in order to qualify for a loan. For those with significant student debt, this debt-to-income ratio cap may well put homeownership out of reach.

And even those Millennials who qualify for a loan may still delay homebuying, or pass on it entirely. It takes twenty years for an average family to save enough for a 10 percent down-payment on an average house. If students are still indebted well into adulthood, this may lengthen the saving period dramatically. Given that experts elsewhere argue that our housing market is already overbuilt for our demographics, underbuying youth could put the whole industry and the whole country in a world of hurt.

[Ball and chain image courtesy of Shutterstock]

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  • Anthony

    “The student debt crisis isn’t just a problem for students;” point of fact: outstanding student loan debt was 956 billion dollars 4th quarter 2012 and percent of student loans 90 plus days deliquent was 11% (both data points may revise up after 1st quarter 2013). This phenomenon hurts economically as you infer WRM but most importantly it reinforces downward spiral financially for many American youth.

  • Kelly Hall

    At what point will the government hold student debtors in a state of indentured servitude, as their debts are no longer dischargeable in bankruptcy? When will hiring decisions be made on the basis of applicants’ student loan debt; that is, if it isn’t already happening? If I were an employer, I might be tempted to use an inverse compensation methodology: the higher the applicant’s student loan debt, the lower the salary offered. After all, the deeply indebted candidate is more desperate and less picky.

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