The First Evidence Is In: Student Loans ARE Hurting the Broader Economy

Wasson and ThornhillStudent Loans

Student loan borrowers are now buying houses and cars less, and have worse credit, than less educated people without student loans.

 

In general Americans who have attended college, and especially if they have gotten a degree, earn more than those how have not. So not surprisingly in the past they have bought homes and vehicles more than those who did not have a college education.

But what if, because of the rapidly increasing burden of student loans, college-educated Americans stopped buying homes and vehicles at the rate they had in the past, and otherwise avoided or delayed their participation in the economy? Indeed what if their rates of purchasing homes and vehicles and other goods were no higher than those who were not college-educated? What if their participation in the economy even fell below that of the less educated?

The First Strong Hints of Lower Participation

The Federal Reserve Bank of New York has studied these questions with very recent data, and its findings provide some of the first tangible indications of serious trouble brewing.

This well-respected entity prepares a quarterly report on nationwide trends in borrowing called the Report on Household Debt and Credit. It focuses on mortgages, vehicle loans, credit cards, and student loans. Its most recent report, on the 1st quarter of 2014, was released accompanied by an analysis of student loan borrowers’ participation in the housing and vehicle markets. It provides very strong evidence of the significant impact of student loans on the economic choices that young adults saddled with student loans are now making.

Declining Participation in the Housing Market

In looking for good evidence of changes in purchasing decisions, the economists looked at the proportion of 30-year olds with home-secured debt during every year from 2003 through 2013. That age was chosen because the median age of first-time home buyers has hovered around 30 for the last decade or so. Their analysis compared the home ownership rates of of those 30-year olds who had student loans (at any time during the prior 3 years) against those who did not.

(Only a very small proportion of such young adults who own homes own them outright. So when looking at those of this age group who owe on a home mortgage you are looking at virtually all the homeowners in that group.)

During the years before the Great Recession–from 2003 through 2007—those with student loans consistently participated in the housing market at a higher proportion than those who did not have student loans. This reflected their income and credit record advantages over those who did not owe student loans.

The homeownership advantage of those with student loans increased during the housing boom. But then from 2008 through early 2011, during and after the Great Recession, the gap between those with and without student loans narrowed, and then flipped. Now during the last couple years a higher proportion of those without student loans are in the process of buying a home compared to those with student loans. For the first time in a long time, 30-year olds without student loan history are more likely to be homeowners than their student loan-saddled colleagues.

Declining Participation in the Vehicle Market

A similar pattern has emerged with vehicle loans. Owing on a vehicle loan is a less effective indication of vehicle ownership than in the housing arena, because of course vehicles are much more often purchased outright or gifted by a parent, or paid off, than a house. But auto debt is still a good indication of young adults’ participation in the new and late-model vehicle market, an important indication of economic participation.

Looking now at 25-year olds—since initial vehicle loans have traditionally been entered into earlier than home mortgages—the Federal Reserve Board of New York economists found that the pre-Recession trend closely followed that of the housing market: those with student loans consistently participated in the housing market at a higher proportion than those who did not owe student loans. This again reflected their income and credit record advantages over those who did not owe student loans.

The vehicle loan participation of those with student loans stayed consistently higher during the housing boom. But then, as with mortgages but even more quickly, from 2008 through the beginning of 2010, the gap between those with and without student loans narrowed, and then drew even. Now during the three years since then, there has been virtually no difference between the two groups. For the first time in a long time, 30-year olds without student loan history are just as likely to be financing a vehicle as their student loan-saddled colleagues.

Student Loan Borrowers Are Hamstrung by Their Lower Credit Scores

In both the housing and vehicle purchasing markets, student loan borrowers have failed to return to their pre-recession participation advantage during these last few post-recession years. Considering the rapid increase in both student loan debt amounts and delinquencies (see our last two blog post about these), one potential reason for the student loan borrowers’ lessening participation would be if they had more limited access to credit because of worsening credit scores.

That is exactly what the Federal Reserve Board of New York analysis uncovered. Looking at the same 2003 through 2013 period, these economists found that during and after the Great Recession the Equifax credit scores of student loan borrowers had gotten worse compared to the scores of non-borrowers.

For 30-year olds, the pre-recession credit scores of student loan borrowers and non-borrowers was very similar, with the non-borrowers credit scores just slightly better, presumably because of the drag the student loans put on the borrowers’ scores. During the 2003 through 2008 period, the gap ranged between only 0 and 6 points of difference in their average Equifax credit scores, in favor of the non-borrowers.

But from 2009 through 2013 the 30-year old borrowers’ scores generally went down while non-borrowers’ scores went up, resulting in a 24-point spread in favor of the non-borrowers by 2013.

For 25-year olds, the situation is even more striking. The pre-recession credit scores of student loan borrowers and non-borrowers were again very similar, but in this group with the student loan borrowers’ credit scores just slightly better. During the 2003 through 2008 period, the gap ranged between only 1 and 5 points of difference in their average Equifax credit scores, in favor of the student loan borrowers.

But from 2009 through 2013 the 25-year old borrowers’ scores generally went down slightly while non-borrowers’ scores went up steadily, so that non-borrowers’ scores quickly surpassed the borrowers’ scores, switching from being in favor of the borrowers to a nearly 17-point spread in favor of the non-borrowers in 2013.

Conclusion

For both 25- and 30-year olds, the credit records of those with student loans has significantly deteriorated compared to those without. It is sensible to infer that this has contributed to student loan borrowers’ inability to participate in the home buying and vehicle purchasing markets as much as they used to just a few years ago.