The ripple effect of student debt

While everyone is aware of the growing levels of student loan debt, what isn’t always easy to see is the impact it has on the larger economy. 

Student loan debt surpassed credit card debt for the first time last year and a new study is making it clear that those high debt levels are slowing the recovery of the housing market.  

Peter Kerwin from the Rhode Island Higher Education Assistance Authority, joined The Rhode Show to talk about the ripple effect of student debt and what it means for the rest of the economy.

Student loan debt isn’t just a problem for students and their families is it?

No.  We talked a couple of weeks back about the National Association of Consumer Bankruptcy Lawyers raising the alarm about what they called the “student debt time bomb”.  It’s something that has much wider implications beyond that large group of students and their families.  There is a real ripple effect there.  

In basic economic terms, whenever you are taking significant amounts of money out of the economy, whenever consumers are spending down some kind of debt instead of spending on consumer goods in a way that helps sustain the overall economy, you have a problem. 

In the run-up to the financial crisis of 2008, you had an expanding housing bubble that created huge levels of mortgage debt that just created a real drain on the economy.

Now think about it in a more specific way.  The Federal Reserve reporter earlier this month that only 9% of 29- to 34-year olds qualified for a first-time mortgage between 2009 and 2011.  That’s down from 17% ten years ago.  And the National Association of Realtors has found that people aged 25 to 34 made up 27% of all homebuyers last year.  That’s the lowest share in the past decade. 

You’ve got students graduating from school with record levels of student loan debt who are not going to be able to buy that first home until they pare down their student debt.  They represent an essential group of first-time homebuyers who are now sitting on the sidelines, even at a time of record-low interest rates.  

And that means current homeowners who may be looking to move up out of a starter home and into something bigger for a growing family, can’t do it because the pool of buyers for their home is limited.

What can be done to help address this problem?

Students and families really need to start looking at the college search process in a new way.  It can’t simply be about getting their kid into a dream school, but getting them into a school which is going to give them a sustainable life.  Do you want to go to your top pick school if that’s going to mean delaying your ability to start a family, buy a home, to get on your own feet and start saving money?

In addition to the attitude adjustment, there are some basic steps people can take--filling out the FAFSA form , maxing out on your federal student loans, considering options like community college and state schools…especially for those students who aren’t sure what they want to do.  Y

ou need to be strategic about how you approach this process and not fall into the trap of convincing yourself that you have to go to a top private college or university to get a great education.