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Doubling in student debt drags down economy

Brian O'Connell
by Brian O'Connell, MainStreet contributor

NEW YORK (MainStreet) — With college students struggling to keep up with college debt, last week President Barack Obama pushed student loan debt front and center.

According to a study from Wells Fargo, 54 percent of millennials say student loan debt is their “biggest financial concern,” while 42 percent say their student loan debt burden is “overwhelming.”

In a May 31 Rose Garden speech, Obama registered his own concern, noting that student loan debt not only hurts graduates, but sours the entire economy.

READ: Paying back a $240,000 education

"Since most of today’s college students were born, tuition and fees at public universities have more than doubled,” he said. “And these days, the average student who takes out loans to pay for four years of college graduates owing more than $26,000.”

“That doesn’t just hold back our young graduates,” he says. “It holds back our entire middle class, because Americans now owe more on our student loans than we do on our credit cards.  And those payments can last for years, even decades, which means that young people are putting off buying their first car, or their first house — the things that grow our economy and create new jobs.”

Indeed, the auto and housing markets are two areas where debt-ridden college grads are really crimping the economy.

According to the Federal Reserve Bank of New York, student loan debt loads measured at $966 billion at the end of 2012 are now even higher in aggregate than U.S. credit card, auto and home equity debt. That makes student loan debt the second-highest U.S. consumer debt behind home mortgages.

In a report from the agency released in April by economists Donghoon Lee and Wilbert van der Klaauw, the FRBNY says that between 2003-09, college graduates around the age of 30 owned homes at the same historical rates as other generations.

But that changed in 2010, after the onslaught of the Great Recession.

READ: 7 financial steps for families to take before college

“Homeownership changed dramatically during the recession,” the FRBNY says. “Thirty-year-olds with no history of student debt saw their homeownership rates decline by five percentage points. At the same time, homeownership rates among 30-year-olds with a history of student debt fell by more than 10 percentage points. By 2012, the homeownership rate for student debtors was almost 20 percentage points lower than that of non-student debtors.”

“Now, for the first time in at least 10 years, 30-year-olds with no history of student loans are more likely to have home-secured debt than those with a history of student loans,” the report says.

The same holds true for college grads and the U.S. auto market.

The report says that, historically, there has been approximately a 3 percent gap in auto debt rates between those U.S. auto consumers with and without previous college loan debt. “As in the case of homeownership, those with a history of student debt were more likely to make debt-funded purchases of automobiles throughout the housing boom,” the Fed says. “While both groups saw steep declines in their use of auto debt from 2008 to 2012, the drop-off in debt-funded auto purchases was particularly steep for student borrowers.

READ: 10 easy ways to avoid big college debts

In 2011, the two trends intersected and, by the fourth quarter of 2012, those student borrowers were actually less likely to hold auto debt than non-borrowers.”

Obviously, the president is on to something. As the Fed research attests, college graduates are in deep with student loans and their consumer economic performance lags nongraduates in critical areas.

And that’s a drag on the entire U.S. economy.

 

Brian O’Connell has 15 years of experience covering business news and trends, particularly in the financial, health care and career management sectors. He has written 14 books and appeared on CNN, Fox News, CNBC, C-Span, Bloomberg, CBS Radio and other media outlets and in such publications as The Wall Street Journal and The Street.com. He is a former Wall Street bond trader.