Tags: student | loan | debt | credit

NY Fed Study: Student Loan Overload May Be Eroding Nation’s Economy

Friday, 19 Apr 2013 07:44 AM

By John Morgan

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The national explosion in student debt may be dragging down the broader U.S. economy and creating an underclass of highly educated but impoverished debtors.

A new study by Federal Reserve Bank of New York researchers shows the titanic volume of student debt — it now stands at $966 billion, more than Americans’ auto loan, credit card and home-equity debt balances combined — is affecting young workers’ post-college economic activity.

The Fed concluded those who have no history of college debt – which would include non-college graduates — actually may be enjoying superior access to credit, and thus better chances for home ownership, auto loans and total borrowing than indebted college graduates.

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The limited access to credit appears to be coupled with lowered expectations of future earnings by student debt holders.

The phenomenon “may have broad implications for the ongoing recovery of the housing and vehicle markets, and of U.S. consumer spending more generally,” the study found.

“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.”

The New York Fed’s Consumer Credit Panel reported the share of 25 year olds with student debt increased from just 25 percent in 2003 to 43 percent in 2012. Further, the average student loan balance for this age group ballooned by 91 percent, from $10,649 in 2003 to $20,326 in 2012. At the same time, student loan delinquencies have been rising significantly.

According to the study’s findings, 30 year olds with no history of student loans are now more likely to have home-secured debt than are workers with no history of student loans, and student loan holders are less likely to hold auto debt than are non-borrowers.

A weakening in the labor markets since 2007 has likely lowered graduates’ expectations of their future income, the study said. But tighter lending standards may also be a factor dragging down their participation in the economy.

“As a result of tighter underwriting standards, higher delinquency rates and lower credit scores, consumers with educational debt may have more limited access to housing and auto debt and, as a result, more limited options in the housing and vehicle markets, despite their comparatively high earning potential,” the study concluded.

Editor's Note: Save, shop and invest like an insider! Our experts lead the way each month in The Franklin Prosperity Report. Click here to learn more.

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