The Center for American Progress and Campus Progress submitted joint comments to the Consumer Financial Protection Bureau in response to the agency’s request for information regarding an initiative to promote student-loan affordability. Read the full comment letter here.
We believe that the growing student-loan burden in this country could make it more difficult for families to achieve future financial security and, if left unchecked, could negatively affect the housing market and the broader economy. In our comments to the Consumer Financial Protection Bureau, we explored key characteristics of the growing student-debt burden and its potential impact on borrowers and the broader economy. We also offered recommendations to help contain the amount of student-loan debt incurred and make student-loan debt more manageable.
The rise in student-loan debt affects Americans of all ages
According to the 2010 Survey of Consumer Finances, 45 percent of all American families hold outstanding student-loan debt, up from 33 percent in 2007. While the majority of student debt is held by borrowers under the age of 35, the rise in student debt also affects older Americans. Thirty-six percent of families in a household headed by someone ages 45 to 54, 29 percent of families in a household headed by someone ages 55 to 64, and 13.3 percent of families in which the head of household is between the ages of 65 and 74 hold student debt.
The average student-debt obligation has also risen significantly, increasing by close to $3,000 for households under age 30 and $6,000 for households between the ages of 30 and 39. Student-loan delinquencies and defaults have risen alongside the increase in student-debt burden: Banks wrote off $3 billion in student-loan debts during January and February of this year alone, according to Reuters.
Economic obstacles for borrowers cause a ripple effect
Not surprisingly, declining incomes, rising housing costs, and higher student debt are all having a ripple effect across the broader economy. First, these factors may be delaying household formation. Two million more adults ages 18 to 34 live in a household headed by their parents than before the recession, an increase from 28.2 percent in 2007 to 31 percent in 2011. Moody’s Analytics estimates that each new household leads to $145,000 of economic activity, suggesting that this delay in household formation could be slowing broader economic growth.
Moreover, the delay in household formation and the financial challenges for adults in their twenties and thirties may alter the future of the U.S. housing market. The Bipartisan Policy Center estimates that Echo Boomers—those born between 1981 and 1995—will drive 75 percent to 80 percent of owner-occupied home acquisition before 2020, when Baby Boomers begin to sell off their homes. Yet homeownership rates for young people are among the lowest in decades.
While home prices and mortgage interest rates are both at historically low levels, the tightening of credit resulting from the housing crisis poses a double obstacle to young people with significant debt. First, due to the implementation of new mortgage regulations under the Dodd-Frank Act, lenders are often requiring that homeowners have a 43 percent “back end” debt-to-income ratio to get a loan. In other words, combined monthly housing costs and monthly debt payments must not exceed 43 percent of one’s monthly income in order to qualify for a loan. For those with significant student debt, this debt-to-income ratio cap may well put homeownership out of reach.
Second, even young borrowers who successfully meet debt-to-income ratios may not be able to set aside enough savings for a down payment. The Center for Responsible Lending calculates that median-income families of all ages take nearly 20 years to save enough for a 10 percent down payment and the closing costs for a moderately priced home. Younger workers may take even longer to save for a down payment, given their other immediate financial obligations, or they may simply never reach this goal.
Effects on retirement security
High student debt also threatens retirement security. According to the Center for Retirement Research at Boston College, 62 percent of workers ages 30 to 39 are projected to have insufficient resources in retirement. This is a far higher concentration than older age groups, and it has increased by 9 percentage points between 2007 and 2010. As nearly 20 percent of people in this age group hold more than $50,000 in student-loan debt, this burden could further undermine their ability to save for retirement.
The combination of inadequate retirement savings and the continued existence of housing debt or rent payments in retirement may be particularly damaging for retirees. In fact, families ages 65 to 74 with housing debt carry a median debt load of $70,000. What’s more, nearly 20 percent of households headed by someone age 65 or older are still renting. In short, more than half of families with a head of household who is at retirement age are still dealing with rent or mortgage payments. Historically, families have sought to pay off their mortgage by retirement to be free from shelter payments and have a source of funding for long-term care. This opportunity may be increasingly out of reach for many Americans.
Recommendations
The following recommendations, explored in detail in the full comment, would equip households with tools to better manage student debt so that they have the flexibility to invest sufficiently in their future financial stability:
- Develop a well-designed refinancing program for student-loan borrowers.
- Promote broader access to income-based repayment programs, which offer affordable payment schedules that correspond to the borrower’s income.
- Consider including private student loans under bankruptcy protection.
- Require school certification for private student loans.
- Encourage broader adoption of the college scorecard by postsecondary-education institutions.
Joe Valenti is the Director of Asset Building at the Center for American Progress. Sarah Edelman is a Policy Analyst with the Housing team at the Center for American Progress. Tobin Van Ostern is the Deputy Director of Campus Progress.