Student Loan Debt Bomb’s Collateral Damage

The cost of college and the accompanying burden of student loan payments are having an enormous impact across many segments of our economic landscape.

From basic consumer spending habits to decisions on living arrangements and so much more, recent college grads are facing a decidedly different economic future than their counterparts a decade or two ago.

I ask once again, Are Student Loans an Impending Bubble? Is Higher Education a Scam?

Many people in the field do forecast an impending student loan debt bomb. Why should we be concerned? For the very simple reason that the bomb is ENORMOUS!!

As US News recently highlighted, Are Student Loans the Next Debt Bomb?:

Total student loan debt has surged to more than $1 trillion over the past few years and with it the number of people seeking help handling their debt. More than 80 percent of bankruptcy attorneys surveyed by the National Association of Consumer Bankruptcy Attorneys reported a “major” jump in student loan borrowers seeking help, according to a study released Tuesday.

“Take it from those of us on the frontline of economic distress in America: This could very well be the next debt bomb for the U.S. economy,” said NACBA president William Brewer. “What we are worried about is that we are looking at the next mortgage-style debt threat to the United States.”

Many economic prognosticators forecast a huge and excruciating pop in the student loan bubble in the very near future.

What very important sector of our economy is already suffering collateral damage from the student loan debt bomb which has not fully detonated? Bloomberg Businessweek provides a fascinating review of how home sales for young professionals have been severely impacted by the weight of student loans. Let’s navigate and appreciate the voluminous details provided in the review, Student Debt Is Stifling Home Sales:

Roshell Schenck has a Ph.D. in pharmacy and earns $125,000 a year. Yet, because she has more than $110,000 in student loan debt, counselors have told her she can’t qualify for a mortgage. “I’d love to buy and can afford to buy,” says the 28-year-old graduate of Lake Erie College of Osteopathic Medicine in Erie, Pa. With lenders scrutinizing college loans more closely than in previous years, it’s almost impossible for borrowers such as Schenck to get approved for mortgages. “My debt is crushing my chances of purchasing a home.”

Last year outstanding education debt passed credit-card debt for the first time, according to Mark Kantrowitz, publisher of FinAid.org, a student loan website. Totaling close to $1 trillion, America’s mounting pile of outstanding student debt is a growing drag on the housing recovery, keeping first-time home buyers on the sidelines and limiting the effectiveness of record-low interest rates.

According to a recent Federal Reserve study, only 9 percent of 29- to 34-year-olds got a first-time mortgage from 2009 to 2011, compared with 17 percent 10 years earlier. “First-time home buyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly,” Fed Chairman Ben Bernanke said at a homebuilders’ conference in Orlando on Feb. 10.

Recent college graduates carry an average debt load of more than $25,000, limiting their ability to qualify for mortgages even if they’re able to land a job in a market with an unemployment rate of 9 percent for 25- to 34-year-olds. Dubbing it a “student loan debt bomb,” the National Association of Consumer Bankruptcy Attorneys (NACBA) warned on Feb. 7 about the effects of rising student debt on recent graduates, parents who co-signed their loans, and older Americans who’ve gone back to school for job training.

“Just as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and renders them unable to engage in consumer spending that sustains the economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future,” John Rao, vice president of the NACBA, said on a conference call.

Although housing prices have fallen by about one-third from their 2006 peak, young adults who are starting to move out of their parents’ houses want to rent, not buy. While single-family housing starts posted their worst year since 1963 last year, multifamily housing construction has surged as more Americans rent.

The housing market does present some attractive opportunities. That said, the burdens of lessened job opportunities and consumer debt continues to weigh heavy on housing. The student debt bomb specifically will inhibit a quick rebound in housing and so much more.

For more on this topic, please read Sense on Cents/Student Loans.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.

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