For policymakers worried about the effect of America's trillion-dollar student debt on the economy, one of the biggest concerns is that borrowers are taking out such large loans—over $26,000 on average—that it may be years or even decades before today's indebted youth can afford to buy a new car or put a down payment on a house. That could spell serious trouble for the housing market—a major driver of growth that relies on a constant stream of new homeowners to bid up property values and generate wealth—and the U.S. economy at large.
Unfortunately, a new analysis from the Federal Reserve Bank of New York seems to confirm that rising student debt has already begun to weigh on economic growth, as student borrowing crowds out auto and mortgage lending and delinquency rates rise.
Here's what's happening. Traditionally, people with a history of student debt have higher rates of homeownership than people without student debt, since student debt holders have, on average, a higher level of both education and income. That trend held among thirty-year-olds (the median age for first-time homeowners) until 2009, when the proportion of borrowers with home-secured debt (a good proxy for homeownership) began to plummet. By 2012, there were fewer homeowners with student loan debt than those without, a major reversal from previous years and clear evidence that, for many would-be homeowners, their student loan burden now outweighs the educational benefits.
The same trend is clear among borrowers with auto debt. Before the recession, 25-year-old car owners with student loans outnumbered those without loans by nearly 15 percent – once again, a reflection of the fact that student debtors tend to be better educated and have higher incomes. But in the aftermath of the financial crisis, car ownership among Millennials with student loans dropped dramatically, falling for the first time below those without loans.
So what changed in the last few years to cause borrowers with student debt to abandon car purchases and home mortgages? Economists Meta Brown and Sydnee Caldwell, the co-authors of the Fed report, offer two explanations.
First, a weak labor market forced college graduates to lower their expectations for their future incomes. Those with loan payments had to cut back even further, lowering their consumption and debt levels in response to the dismal economy.
Second, banks tightened their lending standards in the wake of the recession, making it particularly difficult for people with outstanding debts to get access to additional credit. At the same time, the number of borrowers behind on their student loan payments increased substantially—from around 8 percent in 2010 to nearly 12 percent last quarter—even as other consumers have found their economic footing. That's a worse repayment rate than credit cards.
The result has been a startling divergence in the credit scores of young people with and without student loans, reflecting lenders' growing suspicion of borrowers' student debt levels since the recession.
“Both these factors—lowered expectations of future earnings and more limited access to credit—may have broad implications for the ongoing recovery of the housing and vehicle markets, and of U.S. consumer spending more generally,” Brown and Caldwell write. “While highly skilled young workers have traditionally provided a vital influx of new, affluent consumers to U.S. housing and auto markets, unprecedented student debt may dampen their influence in today’s marketplace.”
Conclusions like that should trouble Republicans as much as Democrats. If student loan delinquency grows more common as the rest of the economy recovers, rising student debt levels could presage a broader generational shift in Millennials' consumer behavior, in which later-in-life car purchases and household formation—including delaying marriage and having children—become the norm.