LOAN CRISIS: JUST HYPE?
BORROWERS SAY THEY’RE BROKE, BUT NOT ALL EXPERTS SAY IT’S HURTING THE ECONOMY
Melissa Cefalu, a veterinarian, and her husband, Andrew, a chiropractor, have their dream jobs. But they’re living a nightmare of self- denial.
Buried under $ 365,000 of student loan debt, they never take vacations, instead snatching occasional long weekends with friends or relatives. Andrew drives a 13- year- old Chevy Tahoe. And Melissa, 35, makes do with her sister’s hand- me- down clothes.
“Every penny is accounted for,” Melissa says, even though the couple’s combined salary is $ 125,000 and they live in the affordable town of Madison, Miss. “I love what I do but … I don’t feel my degree was worth the sacrifices we have to make every single day.”
Many analysts say the nation’s record- high $ 1.34 trillion in student debt is also casting a long shadow over the economy, delaying home purchases, crimping consumer spending and inhibiting business formation. As President
Trump sets out to juice an economy that has grown a lackluster 2% a year since the recession ended in 2009, these economists count student debt — along with an aging population and weak productivity — as another obstacle in his path.
“It delays the economic life cycle for the younger generation,” says Marshall Steinbaum, senior economist at the Roosevelt Institute. “People would have started their economic lives at zero, and now they’re starting at a negative balance.” That, he says, widens the wealth gap and could have “negative consequences ( on spending) that reduces ( economic) growth.”
But with high school graduates poised to enter college later this summer, other economists say the oft- lamented “student debt crisis” is over- hyped.
“You’re paying a higher amount, but your earnings are also higher,” says Mark Zandi, chief economist at Moody’s Analytics.
No one disputes that heavy student debt loads have become more prevalent as tuition has skyrocketed and budgetstrapped states have doled out less money to public universities. Since 2007, total student debt has nearly tripled while the number of people with loans has climbed to 44 million from 28 million. The Great Recession prompted many young adults to stay in school longer, while many older laid- off workers returned to college.
In 2015, nearly 70% of college seniors graduated with student debt, up from less than half in 1993, and their average tab had tripled to $ 30,100, according to the Institute for College Access and Success. All told, about 20% of American adults and 35% of Millennials are burdened by student debt, according to a 2015 Gallup Poll.
Wages have not kept up. From 2007 to 2015, average student loan balances surged 60% while average pay for recent graduates rose 13%, Fitch-Ratings says. About 8 million borrowers are in default on their loans, damaging their ability to rent apartments, buy cars and get jobs.
The biggest toll is in the housing market, some experts say. The homeownership rate for Americans younger than 35 fell to 34% last year from 41% in 2000. The trend has hurt housing construction — and prevents Millennials from building wealth that spurs more spending.
Based on a 3.5% mortgage rate, a homebuyer shelling out $ 203 in student loan payments each month can afford $ 45,000 less in mortgage than a buyer without student debt, Fitch Ratings says. Student debt makes it harder to save for a down payment and make monthly mortgage payments.
“It all adds up to a pretty grim picture for first- time home buyers,” says Bill Warlick, a senior analyst for Fitch.
First- time buyers, who typically drive growth in the housing market, make up 32% of all existing home sales, down from a prerecession level of 40%. Student debt “will be a big shadow that prevents a return back to normal” for at least several years, says Lawrence Yun, chief economist of the National Associa- tion of Realtors.
Graceanne Hillyer of Olathe, Kan., has $ 70,000 in college loans and her husband, Nathan, has $ 30,000. For several years, the couple, who work for the same insurance company, have tried to set aside $ 200 to $ 500 a month for a down payment. But despite total household income topping $ 100,000, the task is more formidable because of their combined $ 1,100 in monthly student loan bills.
“A lot of people our age already have houses,” Graceanne says.
But all isn’t lost. The Hillyers expect to have enough saved for a down payment in two years. A Federal Reserve study found that student debt delays home purchases for adults in their 20s, but by age 30 to 34, the homeownership rates of college grads with and without student debt are nearly identical at about 42% and well above the 30% for those with no college.
Yet the financial strain also affects consumer spending, which makes up about 70% of economic activity. The share of household outlays accounted for by Americans younger than 35 fell steadily from about 16% in 2007 to 12.8% in the fourth quarter, according to Moody’s and government figures.
“It has impacted the affordability of the American dream — from car purchases to home purchases to starting a business to saving for retirement to paying for medical care and cellphone service,” says Natalia Abrams, who is head of Student Debt Crisis, which advocates for borrowers.