Counterparties: The housing drag of student loans
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The Consumer Financial Protection Bureau and the Department of Education released a great new report last week detailing how the market for private student loans ballooned from less than $5 billion in 2001 to more than $20 billion in 2008. In its arc, its reliance on securitization for rapid growth, and its push to lend superfluous amounts of money to individuals with relatively low credit scores, the boom and bust in this market very much resembled the subprime mortgage market. All told, the report points out that there’s more than $150 billion in outstanding private student loan debt, and that the poor outlook for jobs for recent grads is making defaults all the more likely:
In 2009, the unemployment rate for private student loan borrowers who started school in the 2003-2004 academic year was 16%. Ten percent of recent graduates of four-year colleges have monthly payments for all education loans in excess of 25% of their income. Default rates have spiked significantly since the financial crisis of 2008. Cumulative defaults on private student loans exceed $8 billion, and represent over 850,000 distinct loans.
And that’s just private loans. The New York Fed pegs total student loan debt outstanding in the United States at $902 billion as of the first quarter of this year. Dylan Matthews notes that the median amount of student debt last year was $12,800, or about 17% of median household wealth.
Rohit Chopra, the student loan chief at the CFPB, reckons that the links between the mortgage market and the student debt market aren’t just superficial â€“Â they’re causal, too: “Student debt may be more intertwined with the housing market than we realise and it may prove more important every day to understand that connection,” he told the FT’s Shahien Nasiripour and Robin Harding. That connection may already be having an impact: In June, first-time purchasers made up 32% of homebuyers, down 2% from May. In 2011, first-time buyers accounted for 37% of all purchasers, but that’s still the second-lowest level in the past decade, according to the National Association of Realtors. Regulators and realtors aren’t the only ones who are noticing or who are concerned by this macroeconomic relationship. Credit Suisse’s chief economist, Neil Soss,Â agrees with Chopra’s diagnosis:
“We are trying to migrate towards a much safer underwriting standard, with letâ€™s say 20 percent down payments required,” Soss said today. “It takes a certain amount of time for people to save that up, and the more theyâ€™re burdened with student loans the less possible it is for them to accumulate that chunk of liquid capital that allows them to make that.”
If Chopra, NAR and Soss are on to something, then the proposed policy solutions that the CFPB and the Department of Education outline in their report â€“Â namely, allowing only private student debt to be discharged in bankruptcy, while federally issued student debt remains inviolable â€“Â are too anemic to have much of an effect on the broader economy. â€“Â Peter Rudegeair
On to today’s links:
The Fed is closer to action than the last time it was close to action â€“Â WSJ
The Fed’s “monetary policy has little effect on a number of financial markets, let alone the wider economy” â€“Â NYT
Inflation: from threat or menace to friend and benefit? â€“Â LAT