The domino effect of student debt
When this year’s student debt burden surpassed the $1 trillion mark, it became even larger than the amount of debt held on credit cards. New findings now conclude that heavy student loan debt delays the ability of young graduates to buy a home and in the worst scenarios, strips Social Security benefits and even disability income paid under Supplemental Security Income.
“There has been a 46 percent increase in average debt held at graduation from 2000 to 2010. Moreover, total outstanding debt held by the public has skyrocketed 511 percent over the past decade”, according to Denied: The Impact of Student Debt on the Ability to Buy a House, a new research paper by the Young Invincibles, a national youth advocacy group.
Their research shows that the challenges of becoming a homeowner are magnified with student debt. Student loan debt has been rising much more rapidly than salaries for college graduates. When researchers compared salaries of the typical single student loan borrower to the cost of a median-priced house, they concluded that potential borrowers with a student loan and average consumer debt are not likely to qualify for a mortgage. If a married couple carries a double burden of student debt, it becomes even harder to qualify.
Although student loans are usually considered to be a problem for young people, the reality is that many seniors share the same debt dilemma. The Treasury Department reported earlier this year that people ages 60 and older owed $2.2 million on student loans that were 90 days or more past due. As a result, Treasury reduced benefit payments on Social Security checks for 115,000 retirees. Legally, the share of benefits withheld can be as high as 15 percent.
In 2005, the United States Supreme Court upheld two federal laws that enable the government to take money from federal benefits to make student loan payments. The Higher Education Technical Amendments Act allows the federal government to collect funds without statutory limitations from defaulters. A second and related act, the Debt Collection Improvement Act, authorizes reductions in Social Security payments for past due student loan borrowers. The only exemption to this second law is on monthly benefits of $750 or less.
Consumers who owe $60,000 or more on federal student loans are allowed by Treasury to take as long as 30 years to repay the loan. An additional eight years of repayment is allowed in the event of economic hardship or long-term unemployment. In these instances, payments are deferred while the interest continues to accrue.
Who would ever have imagined that a student loan repayment would take 30 years or more? In bygone years the only loans that incurred such lengthy indebtedness were mortgages.
Consumers with blemished credit scores or those with limited funds for a down payment may seek an Fair Housing Administration (FHA) or Veterans Affairs (VA) financing with down payments as low as 3.5 percent. However these loans can be expensive and typically take a longer time to be approved. Since October 2010 three separate price increases on FHA loans have occurred. The most recent was the addition of an upfront mortgage premium payment announced in April that will add $1,500 in upfront costs for a typical home of $200,000.
The domino effect of debt begins with a student loan and then delays the ability to qualify for a mortgage. With other consumer debt payments such as car loans, and credit cards taking a larger share of net income, the ability to gain wealth is limited if not stymied.
Consumers opting for rental housing may find the monthly payment more affordable on a cash-flow basis; but no equity or wealth is derived on rentals. Further, as the rental housing market has tightened, the cost of rental housing continues to increase, leaving fewer disposable dollars to save for a home down payment.
And if parents or grandparents signed for a student loan, the benefits they worked for most of their lives are siphoned and tarnish what ought to be the proverbial ‘golden years’.
The Denied report reaches a thoughtful conclusion: “Policymakers who may be unmotivated by individual struggles of borrowers, or unconvinced of the extent of the problem today, would be wise to begin to view student debt in an additional light: as an encumbrance on the recovery of the housing market, and as a result, a potential hindrance to economic growth.”
Charlene Crowell is a communications manager for the Center for Responsible Lending. She can be reached at: Charlene.crowell@ responsiblelending.org.