The housing recovery remains on track. But high levels of student debt threaten to hang over the residential real estate market for many years, acting as a drag on both household formation and higher prices.
At the height of the housing boom, the U.S. was producing 1.4 million additional households every year. That figure plunged to 500,000 in the Great Recession. The number of new households is expanding again but remains stuck at 700,000—half the peak level. One big reason is underemployed new college graduates struggling with student debt and unable to contribute to the economy.
“Three-fourths of the fall in household formation can be directly correlated to student debt,” Rohit Chopra, student loan ombudsman at the Consumer Financial Protection Bureau, said at a conference last week. His comments were reported on Mainstreet.com.
Chopra said he was seeing signs of far-reaching economic drag due to student indebtedness but that “the impact on the housing market is the most troubling part.” Many recent graduates don’t have the disposable income or the credit score needed to buy a house, Chopra said. So they boomerang back home.
Student loans now top $1 trillion, and 81% of the most burdened borrowers—those with more than $40,000 of student debt—have private loans with interest rates of 8% or higher, according to the CFPB. Unlike federal student loans, private loans not only cost more they offer less repayment flexibility and typically cannot be discharged in bankruptcy. Almost all student debt is difficult, if not impossible, to refinance—sticking borrowers with high rates in a low-rate environment and adding to the economic drag.
In the ombudsman’s annual report, released Wednesday, Chopra detailed the problems that borrowers have trying to pay down their private loans, and how a seemingly intentionally confusing system often holds borrowers hostage. In the end this takes a toll on their credit score—and on their ability to buy a home or anything else with borrowed money.
“Repaying a student loan should be simple,” CFPB director Richard Cordray said in a statement. “When servicers process payments to maximize fees and penalties they undermine the trust of their customers. Student loan borrowers deserve better; they deserve transparency and accountability.”
In the report, Chopra drew ominous comparisons between student debt today and mortgage debt before the housing collapse:
Many of the private student loan complaints mirror the problems heard from consumers in the mortgage market following the wake of the financial crisis…Consumers had difficulty refinancing their mortgages or had problems obtaining a modification of mortgage terms. Improper payment processing sometimes led to improper foreclosure…The similarity between private student loan complaints and problems uncovered in the mortgage servicing industry suggests that many student loan servicers are not taking proactive steps to avoid a similar breakdown.
Little wonder that some have called student loans the next debt bubble. That may or may not be the case. But it seems clear that student debt, and the obstacles to managing it well at the borrower level, will be a drag on the housing recovery and the economy for years to come.