2014 Government Regulations & Business Summit
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By Kathleen M. Howley
BOSTON - Luke Nichter of Harker Heights, Texas, said he’s not a renter by choice. The Texas A&M University history professor’s $125,000 of student debt means he has no hope of getting a mortgage.
Nichter, 35, who’s paying $1,500 a month on loans for degrees from Bowling Green State University in Ohio, is part of the most debt-laden generation to emerge from college. Two- thirds of student loans are held by people under the age of 40, according to the Federal Reserve Bank of New York, blocking millions of them from taking advantage of the most affordable housing market on record. The number of people in that age group who own homes fell by 4.6 percent in the fourth quarter from the third, the biggest drop in records dating to 1982.
“Student debt has a dramatic impact on the ability to buy a house, and to buy the dishwashers and the lawnmowers and all the other purchases that stem from that,” said Diane Swonk, chief economist of Mesirow Financial. “It has a ripple effect throughout the economy.”
The issue is being exacerbated by an explosion in the $150 billion private market for student debt with interest rates for some existing loans surpassing 12 percent. Unlike mortgage holders, borrowers have little hope of refinancing at lower rates. Interest on some new federal loans is set to double to 6.8 percent in July if Congress doesn’t extend the current rate, as they did last year.
“We should be seeing more first-time buyers in the market because in many places, owning has become cheaper than renting,” said Swonk, citing record-low mortgage rates and home prices that remain about 25 percent below their 2006 peak. “Without them, it holds back the move-up buyers and keeps the recovery from being what it could be.”
Combined private and federal student debt doubled since 2007 to $1.1 trillion, according to Consumer Financial Protection Bureau and New York Federal Reserve data, as parents became less able to fund educations in the years following the 2008 financial crash. Homes lost about a third of their value while prices tumbled, leaving many owners owing more on their mortgages than their properties were worth.
In the good years, parents frequently used home equity loans to pay for college, which made the interest payments tax deductible. About $7 billion of equity was cashed out for education at the height of the housing boom in 2006, according to a 2011 paper by Michael Lovenheim, a Cornell University professor.
“Families experienced significant reductions in their home values and maybe dealt with unemployment and the loss of value in their retirement funds,” said Rohit Chopra, student-loan ombudsman for the CFPB, a regulatory agency set up in the wake of the credit crisis. “That meant parents had to shift the costs of higher education to their children, which meant higher student debt.”
The CFPB is developing policy recommendations for Congress and the Department of Education on ways to make student loan payments more affordable with modifications and refinancing options similar to those available to mortgage borrowers, Chopra said. The agency this week ended a public comment period seeking policy suggestions from borrowers and lenders.
Without changes, many graduates are being blocked from the property-owning aspiration known as the American dream, which according to JPMorgan Chase & Co. survived the real estate crash and record foreclosures. In a March survey, nine out of 10 people reported they want to own their own home, the bank said. Yet rental demand is at a 10-year high.