VOL. 39 | NO. 5 | Friday, January 30, 2015
Student debt, rising rents take bite out of real estate market
By Sam Stockard
Hefty student loans are a major stumbling block for young Americans as they try to buy their first home, a National Association of Realtors’ annual survey shows.
In spite of an improved job market and low interest rates in 2014, the number of first-time homebuyers dipped to 33 percent, down 5 percent from the previous year and the lowest since the National Association of Realtors began tracking the rate in 1981.
“Rising rents and repaying student loan debt makes saving for a down payment more difficult, especially for young adults who’ve experienced limited job prospects and flat wage growth since entering the workforce,” says Lawrence Yun, chief economist for NAR.
“Adding more bumps in the road is that those finally in a position to buy have had to overcome low inventory levels in their price range, competition from investors, tight credit conditions and high mortgage insurance premiums.”
Stronger job growth could boost wages, yet almost half of the first-time buyers NAR surveyed said the mortgage application and approval process was harder than they expected, Yun adds.
Credit standards need to be eased and mortgage insurance premiums lowered to bolster first-time buyers as interest rates are expected to rise, Yun adds.
Federal Reserve officials and banking leaders also have sounded a warning that student debt cuts down on the purchase of homes and cars, at the same time reducing retirement savings and limiting small business startups, which hurts future banking revenue.
In mid-2013, the Federal Reserve issued a statement encouraging financial institutions to work with student loan borrowers going through financial problems to modify loans through extensions, deferrals or renewals until they can get through tough times.
Middle Tennessee State University economist David Penn notes that student loan debt is the fastest-growing debt in the nation, edging past mortgage and credit-card debt. It has ballooned to $1.2 trillion, up from $340 million just 11 years ago with nearly 40 million borrowers.
Forty-three percent of 25-year-olds hold some student debt, according to a 2012 Federal Reserve study.
At that time, 44 percent of borrowers got deferments or forbearances and weren’t paying their loans, while 17 percent were past due more than 90 days, up from 10 percent in 2004.
The Fed points out that high levels of student debt delinquency cut into the ability of young borrowers to obtain other types of credit and is associated with higher delinquency on other debt.
The study concluded that, “The higher burden of student loans and higher delinquencies may affect borrowers’ access to other types of credit and the performance of other debt.”
Even worse, as default rates on mortgages and credit cards are falling, default rates for student debt are rising, Penn says.
One non-starter is that the nation is still experiencing economic stress in the wake of the Great Recession, according to Penn, with those 25 to 35 years old finding it difficult to land a good-paying job.
Attitude is another problem, Penn says.
“We have some students walking away, needlessly,” he says.
The federal government owns about 80 to 90 percent of the loans and is willing to work with those holding the debt, but some former students think the problem will simply go away, Penn says, adding many who don’t finish college don’t think they have to pay the debt.
Penn agrees that a hefty student debt might make it harder to save for a down payment on a house, but he points out, “Having a default on your credit report, that’s going to make it tough to get a mortgage.”
President Obama touched on helping Americans burdened by student loans during his State of the Union address, apparently referring to a plan to expand the Pay As You Earn program.
In 2011, Obama widened the net for student loan recipients to cap monthly payments at 10 percent of their income – with annual income above 150 percent of the poverty level – and to make them eligible for debit forgiveness after 20 years.
Reauthorization of the Higher Education Act in 2007 had capped payments at 15 percent of income and enabled forgiveness after 25 years of payments.
The Brookings Institution reported in 2014, however, that the new income-based repayment plan could cost Americans $14 billion annually in the long term. And Obama even proposed limiting the debt forgiveness, though Congress didn’t pass the measure.
U.S. Sen. Elizabeth Warren, a Massachusetts Democrat, continues to push a student loan refinancing bill that would be funded with a tax on millionaires. It was blocked in the Senate last summer after falling two votes short of the 60 needed to withstand a filibuster.
“Exploding student loan debt is crushing young people and dragging down our economy,” Warren says in a statement as she launched her legislation in 2014.
“Allowing students to refinance their loans would put money back in the pockets of people who invested in their education. These students didn’t go to the mall and run up charges on a credit card. They worked hard and learned new skills that will benefit this country and help us build a stronger middle class and a strong America.”
Many of those with outstanding student loans have interest rates of 7 percent or higher, compared to those with new loans taken out at 3.86 under a new act passed by Congress.
Warren’s legislation would have let those with outstanding loans refinance at those lower rates.
For-profit schools, which get 25 percent of federal student loan dollars but are involved in half of student loan defaults, should take responsibility for federal loans if graduates can’t find a job, Warren contends.
U.S. Sen. Bob Corker, R-Tennessee, was one of only three Republicans who voted to send the measure to the floor for debate. But he remains cool to the idea.
“While I think the underlying policy being proposed by Sen. Warren is problematic and I would not support passage of the current version of the bill, I think Congress should debate ways to address the rising cost of education and the way it is being financed,” Corker says.
The average debt for Tennessee graduates is $24,500, 16th lowest in the nation, with a default rate of 13 percent, slightly lower than the national default rate of 13.7 percent, according to figures from the Tennessee Board of Regents, which oversees colleges such as MTSU and the University of Memphis.
The lottery scholarship program provides $304 million to students for tuition and fees. Need-based grants total $61.4 million and state grant aid is $1,484 per undergraduate.
MTSU’s Penn says part of the problem lies with for-profit schools, which have lower graduation rates and higher student debt rates compared to public universities.
With those figures in mind, Penn says public universities remain a good investment for students, but more emphasis needs to be placed on students selecting a major that will lead to a good job.
“You can’t walk away from those loans, and you can’t get rid of them by bankruptcy,” Penn says. The federal government will find out, and it will garnish pay or take the money out of Social Security benefits, he says.
Those who defer their loans run the risk of paying more as interest builds.
Board of Regents outlook
The burden of payment for Tennessee college tuition and fees has shifted from the state to the student over the last decade. Whereas students were paying about 30 percent of the cost at one point, now they’re paying roughly 65 percent with state funding stagnating over the last decade and average tuition and fees rising to $8,335 this year from $4,214 in 2004-05.
“We continue to worry about the cost of higher education and the shift of funding responsibility away from the state and onto student tuition,” according to the Tennessee Board of Regents. “We hope the increased outcomes our institutions have worked hard to meet will be funded this year, which will help us maintain low tuition levels.”
The state Legislature adopted the Complete College Act four years ago but remains about $20 million to $25 million short on funding it.
TBR is working “aggressively” to match student skills with employers and to build “work-ready” training certificates into associate’s degree programs. That will enable students to show an employer the skills they’ve obtained if they need to get a job before graduation.
The state boasts an 85 percent job placement rate for graduates of its Tennessee Colleges of Applied Technology and a similar success rate for community college graduates.
But tracking university graduates is harder because they move more often and could go to graduate school as well, according to the TBR.
“That said, our universities have Career Placement offices and programs geared toward helping both students and alumni find the jobs and careers they want and need,” TBR states.