A crisis looms in US student debt

Rising student debt in the US is dampening millennials' spending habits and hopes for home ownership, with potentially disastrous consequences for the housing market and economy.

There are 40 million Americans who currently owe a collective total of $1.2 trillion in student debt. It is a huge number, but let’s break it down to see why so many experts are predicting that the ramifications of this statistic could “prove to be one of the more painful aftershocks of the Great Recession”.

Let’s look at the numbers. The average student loan in 2005 was $US17,233.  By 2012 that number had risen, according to publicly-listed credit analysts FICO, by 58 per cent to reach $US27,253.

So what does that mean for a millennial graduating today with a near $US30,000 debt?

Well, about 11.5 per cent of them now find themselves more than 90 days delinquent or in default of their student loan -- the only type of loan which hasn’t seen a drop in delinquencies and one which has been rising for more than a decade.

Last week I heard David Stevens, chief executive of the Mortgage Bankers Association, describe the student debt burden as “a huge issue for us”.

It seemed confusing at first that a housing industry group would be commenting on student debt at all, but you see, Stevens and his colleagues have joined the dots.

They say that the 22-year-old college graduate is 36 per cent less likely to buy a home than someone of the same age without student debt.

The association says this has seen first-home buyers account for just a quarter of all sales during the past year, which is at record lows.

“Student debt trumps all other consumer debt,” Stevens said. “It’s going to have an extraordinary dampening effect on young people's ability to borrow for a home, and that’s going to impact the housing market and the economy at large.”

The Pew Center for Research found that only one-third of millennials head up their own household -- that is a near 40-year low.  And that is largely because 36 per cent of them, or 21.6 million young Americans, are still living with their parents. The number of Americans that do choose to move out of home after college is at its lowest level in 50 years; no surer sign of a lack of funds, if you ask me.

What that means for the broader economy is that not only does home ownership go down but so does consumer spending.  If you are not moving out of home, then you are not buying your own coffee plunger or appliances or furniture.  You are not paying an extra electricity bill or getting an internet connection.  Demand for services goes down.

An analysis by New York think tank Demos is even more alarming. It finds that a student taking out a $US53,000 loan will lose $US208,000 over their lifetime because they will be less able to build home equity or save for retirement early in their life.

You can imagine how the prospect of living at home well into your twenties as well as stockpiling a mountain of debt is putting millennials off pursuing higher education.  Particularly when Federal Reserve Bank of New York analysis last week showed that 44 per cent of recent university graduates work in positions that don’t even require a university degree.

Those that do find the debt burden to be too great and fall behind on loan payments will attract bad credit scores that are hard to shake. The knock-on effect being that they will have trouble getting credit cards and applying for a mortgage, even if they wanted to.

What’s more, unlike other debt, most student loan debt can’t be forgiven in bankruptcy.

Just having a student loan makes it harder to qualify for other loans under new mortgage rules that limit total debt for a would-be borrower to 43 per cent of their annual income.

Rohit Chopra of the US Consumer Financial Protection Bureau said at a Federal Reserve Bank of St Louis meeting in November that rising student debt “may prove to be one of the more painful aftershocks of the Great Recession”.

It upends the traditional thinking, which reasons that those with student debts have higher earnings potential and therefore have a better chance of becoming a homeowner.

Not only does the student debt problem put a strain on the US economy, it will end up deterring young people from seeking higher education.

At this point, at least, the rising cost of higher education is not hitting enrolment numbers. Pew finds that 33 per cent of the country’s 25- to 29-year-olds have earned at least a bachelor’s degree. That’s up from 20 per cent of young people in the early 1970s and at a record high. But it also means that there are more young Americans exposed to a potential debt spiral as they try to find a way to pay back their loans.

When you think that of America’s founding fathers who went on to be president only George Washington didn’t go to university, it makes you wonder how America would have been shaped differently had the likes of John Adams, James Madison and Thomas Jefferson opted against pursuing higher education because of the cost.

If America is going to continue its reputation as a knowledge nation and compete economically with China, it is going to have to hit the books and work out a solution quickly.

Mathew Murphy is a Walkley Award winning journalist based in New York.