New Frontier in Student Debt: It Stifles the Housing Recovery

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With the start of another school year, the air is once again filled with angst over the high cost of college. But the discussion is shifting. It’s not just about runaway tuition inflation anymore, or even the individual hardship that excessive college loans create for graduates. Now we’re talking about how student debt is everyone’s problem because it is crushing the economy.

Total student debt recently crossed the $1 trillion mark, more than Americans collectively owe on credit cards. New findings conclude that this debt is shutting young people out of the housing market, further depressing what is already the economy’s most troubled sector. According to Denied: The Impact of Student Debt on the Ability to Buy a House, a report from the youth advocacy group Young Invincibles:

“As monthly student debt payments increase for college graduates, so does their struggle to qualify for a mortgage. Looking at a key factor in qualifying for a mortgage—the debt-to-income ratio—we find some disturbing results. … Home purchases create jobs and spur economic growth. Cutting out a cohort of graduates who previously participated in this market will add another drag to an economy only just emerging from the Great Recession.”

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This drag was probably inevitable. Student debt held at graduation has jumped 46% since 2000; total debt held by the public has soared by 511% in that period. Fed Chief Ben Bernanke has said he does not believe student loans will foment another financial crisis, as mortgage debt did five years ago. But the student loan burden can’t help but forestall things like auto and home purchases. Starting salaries for college grads have not kept pace.

A recent story in the Chicago Tribune illustrates the hardship:

“Take Alex Brooks, a truck driver’s son who studied computer networking at ITT Technical Institute and graduated six years ago with an associate’s degree and almost $40,000 in debt. He’s now one of those underwater graduates, one who is either in a job that could be performed without a degree or in a career that will never throw off enough cash to repay the money owed. ‘This degree was supposed to change my life, and it did. I mean, it honestly ruined it,’ said Brooks, 33, who is driving a bus for a nonprofit group, his credit rating in shambles.”

Anecdotes like these are as common as No. 2 pencils at an SAT exam. The Harkin report in Congress examining for-profit universities is peppered with quotes like these:

“I went to school to better my life, and when my loans become due, I will actually be in worse financial shape then I was before I attend[ed] school. … Another borrower took out student loans ‘in the hopes of improving my knowledge so that I could improve my worth in society, for a higher paying job. Instead now I have a loan to pay off and absolutely nothing to show for it.’”

Yet anecdotes have not moved policymakers, though both presidential candidates are talking a big game about student loan reform and some modifications regarding payback have been approved. One promising development is the growth of free online courses. Imagine how much less college would cost if students were able to get a bunch of credits at no charge—or how much less a university would have to charge if through online courses one great teacher could reach millions of students.

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In the absence of real change, though, activists like Young Invincibles are trying to grab policymakers by the throat—making the case that student debt is everyone’s problem, including the well-to-do. Some are listening. “Students enrolled in colleges here in Chicago and across Illinois are on track to become part of a generation burdened by debilitating debt, limited career prospects and therefore long-term financial insecurity,” Illinois Attorney General Lisa Madigan said recently, according to the Tribune.

The Denied report reaches this conclusion:

“Policymakers who may be unmotivated by individual struggles of borrowers, or unconvinced of the extent of the problem today, would be wise to begin to view student debt in an additional light: as an encumbrance on the recovery of the housing market, and as a result, a potential hindrance to economic growth.”

That should get their attention.