New York Federal Reserve officials have sounded the alarm over student loan debt.
Earlier this week, William Dudley, the president of the Federal Reserve Bank of New York, provided a press briefing on a New York Fed report about household debt, student loans, and the dangers of mounting student loan delinquencies.
Dudley believes student loans could contribute to sluggish economic growth and reduced homeownership.
The rise of student loan debt
According to the report, student loan debt has almost doubled in the last 10 years, totaling about $1.3 trillion in outstanding student debt today. As college becomes increasingly unaffordable for more students, there’s a strong potential for this bubble to burst at some point.
Students graduate with more than $37,000 in student loan debt on average; that number is likely to rise as tuition rates continue to climb.
The disappointing reality is that the increase of student aid and student loans is actually contributing to higher rates of tuition. A report from the National Bureau of Economic Research indicates a 106 percent rise in the cost of tuition from 1987 to 2010. Researchers argue that tuition keeps rising because colleges and universities know students can cover the costs — as long as they borrow money.
Student loan delinquencies on the rise
Perhaps the biggest takeaway from the New York Fed report is the fact that more people are unable to make their loan payments on time. More than one in 10 borrowers are at least 90 days behind when it comes to their student loan payments.
Delinquency climbed to 11.2 percent in the final quarter of 2016 — the highest delinquency rate for all types of household debt, says the report. When grads decide which bills to pay first, they’re putting student loans at the bottom of the list, tackling them only after they pay their mortgages, credit cards, and utilities.
Additionally, the report claims that nearly one-third of 30-year-olds who left college with student loans between 2006 and 2011 had defaulted on their student loans.
Credit scores and buying a home
The report indicates that even with student loans, some grads are still willing to buy homes. College graduates have higher homeownership rates than non-grads, no matter their debt status, says the report.
By age 33, close to 50 percent of grads with at least a bachelor’s degree and student loan debt have bought a home. Even though the homeownership rate is higher amongst those with no student debt, it’s not a significant difference.
However, that doesn’t mean that upcoming grads are going to be able to achieve homeownership.
As New York Fed economist Donghoon Lee pointed out in a Bloomberg article, increased delinquency rates could negatively impact credit scores. With lower credit scores as a result of missed student loan payments, Lee explained, “it will be very hard for them to buy a home.”
Should college be free?
During the press briefing, New York Fed chief Dudley mused on the benefits of free college in the United States. He said that debating the policy about free tuition is reasonable, as rising student loan debt limits borrowers’ spending power and could contribute to slower economic growth.
He added that the absence of free college tuition in the United States is a political choice, rather than something that has been looked at as an economic policy.
Dudley’s comments came ahead of a bill introduced by Vermont Senator Bernie Sanders aimed at offering tuition-free college and lower student loan rates.
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