Student Debt is a Drag on US Recovery
Published: Thursday, March 7th 2013
Mike Murphy wanted to be a doctor like his father. So, after graduating from the University of Wisconsin, he stayed on for medical school and a PhD in neuroscience. Now, at 32, he's a psychiatry resident in Boston, where he lives with his wife, May, and their young daughter. It's a story of hard work and success - but it came with a hefty price tag: $200,000 in student debt.
"It's pretty hard to afford paying $1,000 a month [in student loans] and have a family," he says. "We won't be as well off as my father."
Even with the cushion of an advanced degree and full-time job, Mr Murphy has found himself constrained by debt. The payment - which he'll be making for 30 years - eats up about a third of the couple's take-home pay.
"May is working in large part because we can't afford not to have her work," he says. Their families have helped them out and their car is paid off, but they are careful not run up credit card balances and their home is rented.
Mr Murphy is one of 39m Americans with a total $966m in educational debt - a sum that has tripled since 2004, according to the Federal Reserve Bank of New York. It was the only type of borrowing that expanded through the Great Recession, and in 2010 jumped ahead of car loans, credit card debt and home equity credit to become the largest source of indebtedness behind mortgages.
Faced with tighter scrutiny from banks and their own caution about running up balances, this new generation of borrowers has cut back on spending. They keep their credit cards in their wallets, put off purchasing houses and cars and delay starting savings accounts for their own children's education.
Experts warn this trend raises the possibility that the explosion in student debt will sap economic growth in the US, where consumer spending accounts for around 70 per cent of gross domestic product.
"Consumers with large student debt burdens may spend less and are more likely to have difficulty securing a mortgage," the US Treasury's Office of Financial Research said in its 2012 annual report. "These factors could significantly depress demand for mortgage credit and dampen consumption."
Those fears have been supported by recent studies, such as a Pew Research Center report last month showing young adults are less likely to own homes, cars and other "big-ticket consumer durables", such as refrigerators and washing machines, than their peers were in 2001.
The pull-back in spending is evident in the New York Fed's data. Non-student debt declined for borrowers aged 25 to 30 by about a third from 2005 to 2012. The deleveraging was particularly marked among those with $100,000 or more in student loans: their other debts dropped from an average of more than $50,000 to just over $20,000.
About 7 per cent of the most indebted young borrowers took out new mortgages last year, compared with nearly 17 per cent in 2005 - even as housing has become more affordable and interest rates are at record lows.
Jonathan Rollins, a financial adviser at Neighborhood Trust Financial Partners, says home ownership increasingly appears out of reach for many indebted young people.
"Your debt-to-income ratio can look so high as a result [of student loans]," Mr Rollins says. "Coming up with that down-payment can seem very unrealistic."
Driving the surge in student debt are higher enrolments, as many Americans went back to or stayed in school during the worst years of the downturn, and the rising cost of education. The number of borrowers jumped 70 per cent from 2004 to 2012, and the average balance per borrower - now $24,301 - grew at the same rate in that period, the New York Fed said.
Simply put, more people are paying more money for school. Nearly 13 per cent of graduates owe more than $50,000. At the high end, 3.7 per cent now have balances over $100,000, up from 1.7 per cent in 2005.
Since Kevin Burnett graduated from law school in 2011, his loan balance has risen from $155,000 to $163,000, even though he has paid about $5,000 under an income-based repayment programme based on his and his wife's salaries.
"The payments . . . do not even cover the interest accruing on the loan," says the 29-year-old, who works for an Oklahoma energy company. "So while the [income-based plan] is great in that our $450 monthly payment is manageable, the balance of the loan will continue to increase."
This mounting pressure will continue to haunt young borrowers, Mr Rollins warns. "It has a huge impact on the plans around budgeting and reaching future wealth-creation goals."
Copyright The Financial Times Limited 2013
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