All-of-the-Above Approach Needed to Counter Impact of Student Debt
Americans now hold close to $1.2 trillion in outstanding student loan debt making it the second largest form of consumer debt after home mortgages. What are the implications for housing markets, household formation, and economic mobility for the next generation? Are there creative approaches to reduce the burden?
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By Kent Watkins
Everyone has been reading lately of the elephant that suddenly appeared in the living room, in this case the entire house (!), and prevented it from being purchased or rented by an otherwise qualified person. Although many who took out student debt were the normal new so-called Echo generation entering that phase of their life, others, who had stumbled in the latest economic recession and the overall change in our structured economy itself (lower wages, e.g.), had sought to re-invent themselves by attending schools of all stripes, so long as they were able to put off the bill until later ($1 trillion and climbing with only 39% paying back regularly, see BPC infographic, June 2013).
Now the horror stories are starting to crescendo in the financial, housing, and national media, with many for-profits being unmasked as ones who were in ‘the game’ only to rake in money from the federal government. There were also other blowbacks about ‘regular’ universities whose presidents were given millions in salary and perks, while student loan aggregate amounts there – and tuition rises – were almost in correlation. One of the indirect results has been some indication that homeownership rates and even rental markets are being impacted because of this debt capacity level issue.
Solutions are harder to come by, and not short-term necessarily. First, the federal government must ‘crack down’ on the miscreants in the private sector and refuse to provide reimbursements, such as with Corinthian Colleges. Resistance to this has already come from advocates of free enterprise, saying that throwing out the baby with the bath will not solve the problem. However, they are forgetting that this is not free enterprise, but rather another variation of corporate welfare. The government has been negligent in regulating such practices, albeit a strong lobby force has hindered a great deal of that.
As for the housing aspect itself, can one go beyond the ‘abstinence’ strategy proposed by Michelle Singletary (The Washington Post, July 20, 2014), where a) she recommends that debtors move in with friends or relatives and pay off the loan sooner? Or b) rely on parents to help ‘own’ the mortgage or with the rental payments (rentals also help the construction market, but doesn’t make the realtors and mortgage bankers as happy).
Further, housing advocates should unite in pressing for closer coordination with other groups in the education field to provide c) some form of forgiveness in the case of fraud and non-performance; or longer payment periods, where a legitimate purpose is being served; d) an amendment to the first-time homebuyer and other incentive areas to lower the interest rates another 1%; e) some kind of coordinated financial counseling, so that when someone is contemplating taking out a long-term student (or car) loan, they should also see the context of their other future goals; f) have housing counseling groups work with APSCU, the for-profit trade group, to sanction their ‘bad eggs’ and also develop joint protocols; h) prevail on FHA to continue their waiver on student debt in figuring income-debt ratios; i) housing groups ‘talk up’ the problem as MBA and others are already doing, create a joint task force, appear before influential Congress-persons, CFPB, HUD, Federal Reserve, etc., and press their case for aiding and abetting the housing construction and marketplace; j) ignore the problem and see how it ‘irons out’ in the long-run. Real Answer: all of the above.
Kent Watkins is the Chairman of the National Academy of Housing and Sustainable Communities.
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