Student Debt Could Impact the Housing Market and Broader Economy
By Emily Deruy
Consider the stats before you take out a student loan.
Two-thirds of students take out loans to pay for college, and their combined debt could have a broad impact on the housing market and overall economy, according to a new analysis from the left-leaning Center for American Progress.
This is the case because people are taking out more loans than they used to, but their ability to pay them off hasn't kept pace. CAP notes that banks have written off billions of dollars and approximately 850,000 former students have defaulted on loans just in the first few months of 2013.
People used to take out loans, go to school, get jobs and pay off their debt in a reasonable amount of time. But rising college costs paired with a struggling economy and high unemployment among young people has made that difficult.
Latinos and African-Americans, particularly, are more likely to take out private student loans instead of federal loans than in the past. That can be problematic because private loans often carry higher interest rates and repayment plans are less flexible.
Many people now graduate and return home to live with their parents -sometimes without a job- which means they aren't buying their own homes. Home ownership rates among young people are at some of the lowest points in decades.
Minorities, who are more likely to be burdened with student debt, are expected to represent more than 70 percent of net household growth between 2010 and 2020, CAP notes. But student debt could undermine that figure.
"By 2020, California real estate brokerage Movato.com predicts that half of all new homebuyers nationwide will be Latino"assuming Latino families are able to get mortgages," the think tank wrote in a letter to the Consumer Financial Protection Bureau this week.
The housing market isn't the only thing impacted by rising student debt.
As CAP notes, according to the Center for Retirement Research at Boston College, 62 percent of workers in their 30s likely will not have enough resources when they retire.
That figure is particularly scary because it's gone up nine points in just three years, 2007 to 2010. It's hard to save for retirement when you're still trying to pay off loans, and nearly one in five people in their 30s has more than $50,000 in student-loan debt.
Complicating the issue is the fact that interest rates on some federal student loans are set to double July 1.
While there's general consensus that that's not a good thing, opinion on what should be done is anything but unanimous.
President Barack Obama on Wednesday proposed tying interest rates for federal student loans, which are currently fixed, to the government's cost of borrowing.
Three Republican senators recently introduced a bill that would set fixed interest rates on newly issued federal student loans, which would be pegged to the Treasury's 10-year borrowing rate, plus an additional three percentage points.
CAP suggests developing a refinancing program for student-loan borrowers and increasing income-based repayment programs, which would allow people to make payments based on their income instead of a predetermined rate. The organization also wants schools to certify private student loans.
Whatever is done, CAP warns that without action, "the growing student loan burden could make it more difficult for families to achieve future financial security and, if unchecked, could negatively affect the housing market and the broader economy."