Student Debt Is Destroying The Housing Market: Graduates Can't Afford Houses Because Of High Student Debt And Bad Credit Scores

on October 31 2013 9:15 AM
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Student loan debt has far-reaching negative effects on the U.S. economy. Flickr

Student debt has always been a burden for the average American scholar, but the level of debt has been on a meteoric rise since the late 1990s and is now having serious effects on the U.S. economy.

The 511 percent rise in student debt since 1999 isn’t because of a huge increase in the student population but because of the rising cost of university education, which has been increasing by 8 percent over the past 30 years, about double the rate of inflation. The combined "damage" recently surpassed $1 trillion, according to the Federal Reserve Bank of St. Louis.

And the damage extends far beyond the individuals who have to make their monthly payments. At a conference hosted in Miami in early October, the student loan ombudsman at the Consumer Financial Protection Bureau, Rohit Chopra, said that student debt was seriously impacting the number of new households being created. Before the recession, the U.S was producing 1.4 million homes every year. The number plunged to just a third of that in 2009 and has since risen steadily to 700,000, where it's now stuck.

One of the main issues is that new graduates are underemployed, currently at 40 percent, according to a recent Reuters poll. With an average student debtload of around $25,000, most graduates are unable to contribute much to the economy due to lack of disposable income, and with stricter rules on bank lending and the credit score required for mortgage approval, they're not buying houses anytime soon.

“Three-fourths of the fall in household formation can be directly correlated to student debt,” said Chopra.

The most burdened borrowers face debts of more than $40,000 and have private loans with interest rates of 8 percent or higher, according to the CFPB. Private loans cost a lot more than federal loans, and neither can typically be discharged. Those numbers don't bode well for the U.S. housing market, which is still a long way from recovery. 

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