The amount of debt that’s being carried by certain consumers in this country is growing by about $2,800 a second.
It’s not mortgage debt, and it’s not credit card debt. Those are two financial time bombs we’ve (kind of) gotten a handle on, by some analysts’ reckoning. No, this credit menace is student loan debt, which is pushing $1 trillion, according to FinAid.org, a site dedicated to college financial aid information that has created a “Student Loan Debt Clock” where, if you like to be uncomfortable, you can watch this debt as it piles up, at a rate FinAid pegs at around $2,800 a second.
Potential ripple effects are numerous, including whether a generation will be able to buy homes, said Rick Palacios Jr., senior research analyst for John Burns Real Estate Consulting, an Irvine, Calif., company that analyzes social and economic trends for the housing industry. He talked about how the burden of student loan debt is likely to put homeownership out of reach for many grads.
Q: How much student loan debt is out there these days?
A: The Federal Reserve Bank of New York recently revised a lot of its data, and it announced it had been understating student loan debt by a couple hundred billion dollars. Where the Fed thought in the second quarter of 2011 that student loan balances were $550 billion, it now estimates that the number in the second quarter was $845 billion. That’s greater than all of our outstanding credit card debt and other types of household debt, except for mortgages. And it’s growing at a ridiculously high level. College students who graduate with loan debts carry an average balance of $25,000.
One thing that caught my eye (in the New York Fed data) is the way that student loan debt is categorized. It doesn’t capture anything that would be put on credit cards or on home equity loans that we know parents take out to pay for education. So the amount of school-related debt is probably bigger.
Q: How will this affect the country, demographically?
A: If you look at the census data that they’re slowly releasing, one of the things that we’re starting to see is that student debt is having an impact on household formations — the decision to get married and have children. They’re putting off forming households.
Q: And, in turn, how does that affect the future of housing?
A: In the age group of 25- to 35-year-olds, which is a prized demographic for the housing business, you’re going to be saddled with a lot more debt than you would have a decade ago coming out of college. They’re a big group, and they’ve moved back with their parents; almost 6 million in that age group now live with mom and dad, up 26 percent from the beginning of the recession in 2007. Many others are renting.
But certainly, few are buying. The homeownership rate for people 25 to 29 is at its lowest level since 1999, and for 30- to 34-year-olds it’s the lowest rate in 17 years.
This will be a boon for the rental market. It will take these people a lot longer to qualify for a mortgage.
Q: In the fall, President Barack Obama issued an executive order to put further caps on how much these debtholders of federally backed loans must repay each year, reducing it from 15 percent to 10 percent of their discretionary income. Won’t that help?
A: That shaves off a fraction, which is good. But I don’t think it’s going to make a huge impact. Given the tight mortgage-underwriting standards, I doubt that many of them would be able to qualify to buy a home with that much debt obligation.
Another aspect of that, which has gotten some publicity during the Occupy protests, is the default rate on these loans. Some of the protesters said they were angry with the high cost of obtaining an education and said they weren’t going to pay back their loans. Well, student loan default rates are going up: At private institutions, the rate is 4.6 percent; at public schools, it’s 7.2 percent; and at for-profit institutions, it’s 15 percent. Once that blemish is on your credit record, you can’t escape that.
Q: Eventually, both the parents and their adult children will be weary of this doubling-up trend, and even if the offspring can’t buy, they’ll rent. Is there an adequate apartment supply to meet the demand?
A: Yes, rentals will be the obvious beneficiary. We think the apartment supply will be adequate, and there’s a lot of supply in the pipeline right now.
And, of course, in the doubling-up situations, eventually you do reach a boiling point — both parent and child do — but the economics of it will still make it difficult for them to move out.
We haven’t done much research, as far as what types of housing builders should be building to meet their rental needs — whether, say, they should build more three-bedroom apartments for roommate situations, or maybe studios for those who will be on their own.
But one thing we’ve seen in recent quarters is the number of builders who are offering more of a multigenerational home (for purchase), for parents who may be living with 20- to 30-year-olds. Where builders are constructing those, those homes have been outperforming in their markets.
And I believe that we’re seeing more parents helping out their kids with down payments; that might be a way to get them out of the house.
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Filed under: College Tagged: Business, government, student loans, Tuition
