Student Debt Isn't Hurting the Economy the Way You Think

It's not the debt. It's the delinquencies.

Last month, the Federal Reserve Bank of New York released a report that seemed to confirm the widespread suspicion that student debt had turned into a drag on the wider economy. More precisely, it argued that America's big bundle of education loans was taking a toll by preventing young adults from buying houses or cars, the twin pillars of consumer spending. It found that by age 30, student borrowers are now less likely to have taken out a mortgage or auto loan than young adults who were college-debt free.


Why might that be the case? The combo of debt and murky career prospects has a way of chilling one's desire to invest in a home. It also doesn't make much sense to settle down when there's a good chance you may have to move for work.

But there's more to it than that. Lending standards have gotten suffocatingly tight in the wake of the housing bust, and young people with too much student debt compared to their income, or who've fallen behind on their loan payments, may simply be unable to qualify for a mortgage. As the Fed noted, student borrowers now also have worse credit scores, on average, than their ed-debt-free peers.


That's the big picture story. But I want to focus on the small picture for a moment -- the granular picture even. Because the truth is that most young people with student debt are still more likely to take out a mortgage than their debt-free peers, as this New York Fed graph from a separate report shows. The big exception is borrowers who are delinquent on their loans (shown in red). 


The problem is that the delinquency rate has just about doubled since 2004. More than 15 percent of all borrowers under 30 are now 90 days or more behind on their payments. The universe of young adults who have any shot of getting a mortgage has shrunk.

This is why I'm both a bit less worried about the impact of student loans on the economy than writers like Mike Konczal, but more so than my colleague Derek Thompson. Student borrowers who have managed to keep up with their payments are buying homes less often than they were before the housing crash, but the decline seems to have halted, and hasn't been far out of step with what's happened to their non-borrowing peers. On the other hand, the problem pretty clearly isn't a result of students consciously choosing to invest in education rather than real estate. It's that there's a significant chunk of twenty-somethings who borrowed to finance school and now can't keep up with what they owe.

Paying back student loans is probably stopping some young adults from buying a home. But I'm guessing it's the ones who can't pay them back who are the much bigger problem.


For a bit more about student loan delinquencies, and what might cause them, check out my piece from yesterday.