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Nancy Starczyk: Student debt hurts housing

Posted: June 18, 2014 2:00 a.m.
Updated: June 18, 2014 2:00 a.m.

 

With student loan debt nationwide at an estimated $1.2 trillion, homeownership for many recent and past graduates is a distant dream.

This is the harsh reality for a prime home buying age group, a limitation that impedes full recovery of the housing market and limits the economy.

“It is not an overstatement to say that we are now standing at a precipice when it comes to the magnitude and consequences of our student loan debt in this country,” said Richard Cordray, director of the Consumer Financial Protection Bureau, noting that total student debt is second only to mortgage debt as a category of consumer finance.

“This fast-growing burden is a pressing problem and a matter of grave importance to public policy in America,” Cordray said.

Speaking recently before an audience at the Boulder Summer Conference on Consumer Financial Decision Making, Cordray noted the negative ramification of student loan debt on the housing market.

Consumers complained to the Bureau that their student loan debt burden was preventing them from buying a home, opening a small business, or starting a family.

An estimated 7 million Americans are in default on their loan and the way rules are written now many cannot refinance their loan to a lower interest rate.

The U.S. Senate was expected to consider a measure that would allow for some refinancing, but the gridlock in D.C. is likely to kill that and other efforts because of debate on how to offset the cost lowering interest rates.

Another initiative that the Administration was advancing was an expansion of what is known at the Pay As You Earn option, which limits monthly payments to 10 percent of income. The proposed expansion would extend it to those who borrowed before 2012.

Yet both of these positive initiatives fall short of a true fix, especially in light of the rapid increase in tuitions at a typical four-year public university and decades of stagnation in family incomes.

This is one of those issues that wind up having profound implications for housing.

Cordray noted a Federal Reserve Bank analysis that said, for the first time in at least a decade households with student loan debt are less likely to have a mortgage than those without student loan debt.

A recent National Association of Realtors study found that 49 percent of Americans cited student loan debt as a “huge obstacle” to homeownership.

Furthermore, student loans can have a crippling long-term effect on the economy, with younger borrowers unable to invest in small businesses or save adequately for retirement. The CFPB director called the current state a “vicious cycle.”

The obligation—or the inability—to pay back student loans ripples throughout the entire economy.

Cordray cited a Pew study that found 40 percent of younger households, classified as homes headed by someone under the age of 40, have student loan debt.

“Tuition costs have risen rapidly. Debt has risen even faster than tuition and default rates have increased.

Graduates are earning less because of the recession. It has become increasingly clear that a weak labor market and rising student debt are putting the squeeze on young people,” Cordray said.

“It is also profoundly discordant with basic notions of equal opportunity,” he said, “if young people with merit, and who lack only the means, are unable to advance or end up crushed under student loan debt for much of their lives.”

Typically, higher education yields higher incomes, but post-recession this traditional trend seems to have vanished.

Nancy Starczyk is President of the Santa Clarita Valley Division of the Southland Regional Association of Realtors.

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