American dream eludes under-40s saddled with student debt
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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, the Department of Education and the Treasury Department on ways to make student loan payments more affordable with modifications and refinancing options that may be 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.
Thwarted would-be homeowners are helping to support rental demand for single-family foreclosed homes, the emerging institutional asset class that investors including Blackstone Group LP, based in New York, and Colony Capital LLC, in Santa Monica, California are accumulating. The U.S. homeownership rate fell to 65.4 percent in the fourth quarter, the lowest since 1997, according to the Census Bureau.
"Buying a home and having a family are the hallmarks of middle-class American life," said Robert Lawless, a professor at the University of Illinois College of Law in Champaign. "The hope is still alive, but for now a lot of people are being forced to rent because all their money is going to pay off their student loans."
Nichter, author of "George W. Bush: Life of Privilege, Leadership in Crisis," published last year, grew up in a suburb of Toledo, Ohio. While he pursued an education that culminated with a doctorate in philosophy from Bowling Green State University, many of his high-school classmates decided to skip college.
Instead, they got jobs, started families and bought houses by the time they were 30 years old, Nichter said. They could do that because they weren't saddled with student debt. About 17 percent of Toledo residents over the age of 25 have college degrees, according to the Census Bureau.
"It's not that their decision was better or worse," said Nichter. "The point is, it's a shame when going on and getting a degree means you can't have that American dream."
While higher education comes with higher debt, it also comes with better pay. A worker with a bachelor's degree had a median weekly income of $1,066 in 2012, compared with $652 for someone with a high school diploma, according to the Bureau of Labor Statistics. The unemployment rate for a college graduate was 4.5 percent, compared with 8.3 for people with only a high- school degree.
Some former students like Nichter and his wife, Jennifer, owe too much to pass muster for a mortgage in the most restrictive lending environment in decades. Her payment on $120,000 of student debt pushes the couple's monthly bill to about $2,500, Nichter said, putting them outside the debt-to- income gauge lenders use to screen mortgage applicants.
Others tarnished their credit histories with missed payments as they tried to find post-graduate work in a weak labor market. Almost a third of borrowers in repayment are 90 days or more overdue on their loans, public and private, according to the New York Fed.
While a bankruptcy can wipe out housing and credit card debt, there's no absolution for student loans. Since a 2005 change in bankruptcy laws, student debt can't be discharged, barring reasons such as severe and permanent disability. Lenders can garnishee income tax refunds, wages, and even Social Security checks to get repayment.
"You are more likely to die in a car accident than get your student loans discharged in bankruptcy," said Mark Kantrowitz, who runs FinAid.org, a website about college grants and loans. "You can't escape student loans."
SLM Corp., known as Sallie Mae, originated $3.3 billion of private student loans in 2012, a gain of 22 percent from a year earlier, the Newark, Delaware-based company said in a Jan. 16 statement. For this year, SLM is projecting a 21 percent increase in lending, to $4 billion.
The company rose 0.7 percent today as of 4:30 p.m. in New York to $20.92, after reaching a five-year high yesterday. The shares are up about 42 percent in the last 12 months, including reinvested dividends, more than double the gain in the Standard & Poor's 500 Index.
In the run-up to the 2008 economic crisis, underwriting standards for private student loans loosened as they were packaged into securities and sold to investors, much like subprime mortgage bonds. Credit-score standards slipped, and some lenders didn't even check to make sure the borrower was in school, according to the CFPB's Chopra.
In some cases, the borrowers were teenagers who made bad decisions while assuming a dream job awaited them upon college graduation, said Mesirow's Swonk. In addition to tuition, cash from student loans can be spent on rent, food, vacations, and even keg parties.
Megan Lilburn, who in 2004 graduated from Texas Christian University in Fort Worth, Texas, with a degree in social work and religion, said she wishes she lived more frugally in school. She racked up $40,000 of debt by the time she got her graduate degree. As a result, Lilburn will have to remain a renter after her first child is born in September, rather than buy the home she had planned for her family.
"If I had a chance to do it again, I would never have gotten student loans," said Lilburn, 31, who works as a chaplain in a children's hospital in Fort Worth. "I would have learned to live on a budget, and I probably would have lived at my parents' house and commuted."
About 37 million people have public and private student loans according to the New York Fed. Almost half of those loans are in deferment, meaning borrowers don't have to make payments while in school or while going through financial hardship such as unemployment. However, in many cases interest keeps accruing during those periods, adding to the loan's principal.
The $70,000 in student loans Rae Roca-Picket had when she graduated in 2007 from Ohio Northern University in Ada, Ohio, have ballooned into $107,000 because of accrued interest that was capitalized into the loan's balance.
"When I started college, when I was 18, the economy was good," said Roca-Picket, 29, who is expecting her first child, a son, in July. "We didn't know that after we graduated it was going to turn into the worst economy since the Great Depression."
About 61 percent of bank risk managers expect student-loan delinquencies to rise over the next six months, according to a report this week by Fair Isaac Corp., the company that created the FICO credit-scoring system. The same respondents said delinquencies on all other types of consumer loans probably will stay at the same levels or decrease. The report didn't give reasons for the expectations.
For federal loans, people who work in the public or nonprofit sector may be able to shed their student debt after 10 years of payments, said Lauren Asher, president of the Institute for College Access & Success in Oakland, California. Three- quarters of the Class of 2011 graduated with student loans and their average debt was $26,600, she said.
"The question is: how much more risk are you willing to shoulder when you are already carrying significant debt?" Asher said. "It affects decisions about when to have a family, how much you can save for retirement, whether you'll buy a home and whether you'll start a business."
Tiffany Loftin, 24, who graduated from the University of California, Santa Cruz in 2011 with a degree in political science and $28,000 in student loans, said she was the first person in her family to go to college and she had hoped to be the first one to buy a home. She missed her student-loan payment last month because she needed new eyeglasses.
"We went to school like we were told to do, to join the middle class and be good citizens," said Loftin, who lives in Washington. "But, if buying a pair of glasses comes down to me missing my payment, I wonder if I'll ever be able to live that life."
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