Next On The Blame Game: Student Loans

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Photo: Richard Seely

In an email to its clients, Dominion Bond Rating Service (DBRS) proclaims “STUDENT LOAN DEBT WEIGHS ON U.S. ECONOMIC RECOVERY”. Student Loans will prevent a generation of potential home borrowers from every qualifying for a loan.According to the CFPB and the Federal Reserve Board, Americans have over $1trillion worth of student loan debt and this figure keeps increasing while other debts (credit card and autos) have decreased dramatically. The only debt greater than student loans is mortgage loans.

Well, as we used to say on the floor, “Duh!”

This very severe and extended recession kept students in school longer and caused unskilled workers to go to school to improve their earning potential. In both cases, these students took out sizable student loans. As they finished their degrees, the recession hadn’t abated and they were left without jobs or prospect of jobs.

Yes many looking took non-economically viable degrees like art history or Islamic architecture but the job market hasn’t recovered like in past recessions. Even students from prestigious institutions are looking for good jobs or have been forced to take lower paying jobs (Do you want fries with your burger?).

A student loan is one of the very few debts that aren’t written off by bankruptcy. In 2005, President Bush signed into law the bankruptcy reform act which allowed private student loan originators to have a higher priority in bankruptcy than almost any other debt, with the possible exception of federal tax liens.

Only in death does student loans have a priority of unsecured debt. While other debt is charged off or forgiven, student loans can live on forever. Many Democratic politicians have introduced legislation to place student loans at the same level as other unsecured debt like credit cards or forgiveness due to hardship. The GOP on the other hand want students to take responsibility for their debts no matter what and therefore won’t agree to a change in the law. Don’t expect this law to change any time soon.

Student loans are not a drag on the economy at the moment but will have a minor but noticeable effect as consumers de-lever all other forms of debt as this is a problem of the young and/or the unskilled. Many of these people will never truly be able to get rid of this debt and therefore never be able to get the level of credit available to those gainfully employed with degrees prior to the recession. Cheery scenario, no?

DBRS is out proclaiming the death of the US housing recovery due to student loans. They write:

“Some of the items precluding them from being approved for a mortgage may include larger down payments, the potential lack of an established credit history, and the disinclination by lender’s to consider a limited employment history which has resulted in many student borrowers renting or moving back home. Furthermore, certain graduates may also opt to continue with graduate level studies which may add more student loan debt and push buying a new home much further into the future.”

While many of these students maybe locked out of prime credit for years, DBRS makes the implicit assumption that subprime lending is dead forever. I disagree. Subprime mortgage lending will come back as the regulatory framework and risk pricing stabilizes. My crystal ball says four years from now. The other assumption DBRS makes is the lack of household formation from immigrants which has been increasing and they are used to a cash economy.

The housing market has many fundamental problems which are much bigger than student loan debt which will keep it depressed for the near future.

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