American college grads are saddled with lots of student debt. With unemployment rates high and delinquencies on the rise, the question is whether student debt is putting the economy at risk of a crisis.
In a recent note, Vanguard’s Joseph Davis gave some context to this question. He drew up a comparison of student debt levels with mortgage debt levels before the subprime crisis.
It’s not even close.
At its peak in 2007, mortgage debt to GDP was 62%. Right now, outstanding student debt is just 7%. Davis created a handy table showing further comparisons.
The drag from increased student debt levels is not nothing — Davis calculates that student debt lowers the probability of owning a home in one’s lifetime by 1.5% and that between 2008 and 2012 U.S. housing demand fell by approximately 36,000 homes per year (or 3.5% of first-time home buyers) as a result of growing student debt volumes.
But the benefits to income from greater education far outweigh those costs: While the existence of student debt lowers the odds of homeownership, graduating from college increases the likelihood of purchasing a home by 10.8%, relative to not attending college at all.
All this debt, then, is presumably leading to a payoff. It may be slower in coming, but we’re definitely not heading over a Lehman cliff because of it.
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