Part One of a three-part series on student debt and the middle class. Click here to read Part Two and click here to read Part Three.
A trillion dollars of student loans may not be the next subprime crisis, but it is delaying traditional middle-class aspirations like home ownership. Around one million students will graduate college in debt this spring, with an average $23,000 to be paid off over a period of ten to twenty years; more than enough to discourage young people who might otherwise have taken on a mortgage on their first house.
According to Census data, less than half of those aged 25–34 years old are homeowners today, the lowest percentage since 1999. Despite a brief upsurge in young homeowners signing subprime leases during the heady days of the mid-2000s, on net nearly all of the 11 million unit household growth of the last ten years occurred among older households, while Millennials—children of the Baby Boomers born between 1982 and 2000—are now overwhelmingly choosing to rent or move home with their parents. That's problematic because first-time buyers are critical to the health of the housing market, which depends on new blood to finance older sellers' movement into the higher ranges of the market. It's also a major contributing factor in the continued weakness of the construction sector: single-family housing starts for February were down 12.5 percent from the same time two years ago, while renter-friendly housing was up 197.5 percent.
Although housing prices have fallen by about a third from their 2006 peak, and interest rates are near historic lows, just 9 percent of those aged 29–34 years old got a first-time mortgage from 2009 to 2011, compared to 17 percent a decade earlier. Of course, much of the slowdown in Millennial's household formation is due to the recession: their employment-to-population is near 45 percent, the lowest it's been in sixty years, and many of those with jobs are working part-time or at jobs that don't require a college degree. But a trillion dollars in student loans has added an unprecedented debt overhang to the mix, worsening generational problems such as underemployment and low consumer spending. Those loans will be “a drag on the economy for the foreseeable future,” according to National Association of Consumer Bankruptcy Attorneys vice president John Rao. “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.”
Century Foundation Fellow Dan Alpert also worries that student loans, which act as a tax on future wages, will cost the economy down the road: “Just as during the mortgage crisis, the increases in consumer debt—assuming limited growth over the next few years—is pulling forward consumption from future periods that will not be repeated because of the increased debt load.” Unfortunately, Americans have done a poor job of deleveraging since the recession; total consumer credit has actually increased about 9 percent since this time last year. But much of the increase in outstanding consumer credit has been driven by the outsized rise of student loan debt, which last year surpassed total credit card and auto loan debt. Experts believe this confluence of factors—debt overhang, high unemployment, changing patterns of consumer behavior—may lead to a “spending void” that Millennials will be unable to fill as their Baby Boomer parents retire. So while a trillion dollars of student debt may not be enough to topple Wall Street, the impact of Millennial debt on traditional middle-class consumer behavior—purchasing a home, buying a car and starting a family—may be more insidious and long-term than we yet realize.