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Student loan debt: Housing Crisis 2.0

POSTED March 4, 2014 5:47 p.m.

America is about to get another harsh lesson in easy money.

And you can credit it once again to Uncle Sam’s meddling with longstanding lending rules.

Remember how political pressure from Congress and the White House to make it easier for more Americans to buy homes triggered the Great Rescission that we are still trying to shake off?

Not only did federal edicts to relax lending standards put marginal buyers into homes that a good number lacked the discipline or the income to manage the monthly mortgage payments but it also encouraged others with healthier income to gobble up more house than their wallet could handle. It also opened the floodgates for people to use mortgages on their homes to leverage all sorts of purchases ranging from new cars to expensive vacations to day-to-day expenses.

At the same time, it allowed unscrupulous lenders to pile more debt on borrowers that weren’t qualified so they could line their own pockets. Meanwhile, everyone from new home builders to those selling their own homes were handed market dynamics that helped drive up the price of everything including their profits as demand outstripped supply thanks to the number of buyers created by easy loans.

It took a good 10 years from the start of the housing boom financed by easy money for the house of cards to start collapsing.

Keep that in mind now that easy money via student loans is coming home to roost.

Here are the facts:

• Between 2003 and 2013, student loan debt quadrupled going from $250 million to $1.08 trillion.

• While the percentage of credit card, mortgage and auto debt that is 90 days plus delinquent has dropped significantly since the peak of the recession in 2009, student loan delinquencies have skyrocketed 33 percent.

• The earning expectations of college graduates have declined in recent years. That despite the cost of college and loan debt rising significantly.

• Audits of loans programs show students are taking more and more money out in loans to cover “living expenses.” A study of colleges in Minnesota by Capella Education Co. revealed in some masters program where costs for an education totaled about $18,800 in tuition, books and fees the typical gradate left school with $30,200 in student loans.

That means day-to-day living expenses for college students whether it is buying pizza, rent, purchasing music, the latest fashion styles or whatever is being financed long-term, along with the cost of education. Since students rarely have the means to start paying down student loans beyond the minimum payment, that means an $8 pizza could end up costing them almost $40 by the time the loan is paid off. It is no different than what many people were doing with equity home loans and credit cards. There is one big difference: Student loans trump all other debt including mortgages and credit cards. It is not easily discharged through bankruptcy court.

So why does this matter to you?

Housing, we have found, is a major economic driving force. It tanks and we all are hurt financially in one way or another.

The National Association of Realtors did a study that revealed 20 percent of first-time buyers had difficulty coming up with a down payment. Of those, 54 percent attributed it to their precarious financial situation due to student loans.

Higher student loan debt and lower post college wages mean less and less college graduates can afford to buy a home.

The Washington Post last month profiled college grads who were working in full-time jobs with good incomes who were stunned that their student loan debt precluded them from buying a home.

One such grad was 26-year-old Stephanie McCloskey. The administrative assistant had the income to buy a home in a Washington suburb but her debt loan was too high thanks to $30,000 in student loans that saddled her with a $500 a month minimum payment.

The Federal Reserve Bank of New York as well as the Consumer Financial Protection Bureau among others have warned that the growing student debt load of the past 10 years may become a major drag on  housing.

The easy money meant a steadily growing stream of people could go to college using loans that they used upwards of 20 percent for living expenses instead of relying on other sources of income such as multiple part-time jobs.

The real benefactors of such money policies are colleges. With an ever-growing supply of students, higher education is the last bastion of 20th century commerce in America. Higher education has not had to reconfigure its basic way of doing business to stay afloat amid changing economic realities. Free flowing money means no pressure to streamline administrative overhead, improve product delivery, or be more competitive on pricing.

Of course those in academia like to argue there’s is a calling and not a business. However, the fact no one with a full-time position in the upper levels of higher education, whether it is management or “top producers,” has exactly taken a vow of poverty undermines their argument that colleges should be exempt from the same market forces that shape the rest of the country.

Making this all the more ironic is how some of the most expensive education institutions in this country supply their administrators with free housing and subsidize homes for some of their top-tier professors.

As such, they don’t have to worry about the nuances of debt load when it comes to securing shelter.

This column is the opinion of Dennis Wyatt and does not necessarily represent the opinion of The Journal or Morris Newspaper Corp. of CA.  He can be contacted at dwyatt@mantecabulletin.com or 209-249-3519.

 

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