Speaking at the 56th annual meeting of the National Association for Business Economics (NABE) on Monday, U.S. Department of Treasury Deputy Secretary Sarah Bloom Raskin said she does not see the nation's growing problem of student loan debt leading to an economic meltdown – and student loan debt may not be affecting a borrower's ability to buy a home, depending on that borrower's financial situation.
Raskin said that while student loan debt in the U.S. is a "serious burden for far too many borrowers," totaling more than $1 trillion and is growing at approximately 11 percent every year, she does not believe that it is "inherently bad" when considering its significant return on investment where higher education is concerned.
"We cannot understand the macroeconomic impact of student loans without incorporating the full economic and societal benefits of a more educated workforce," Raskin said. "That is, what would the macroeconomic effect be if borrowers had no debt, but also lacked the higher education that comes with it?"
Raskin pointed out that the "vast majority" of borrowers are current in their payment of student loans compared with those that are delinquent or in default. When examining the data concerning how student loan debt is affecting the borrower's ability to obtain a mortgage loan for a home, she said it depends on what other financial resources are available to the homebuyer or how close the homebuyer is to having enough money for a down payment.
Acknowledging that single-family home sales are still far below their pre-recession levels, Raskin then gave as an example the fact that the average borrower in 2012 would have saved about $800 per year if the student loan debt did not exist. This amount, she said, would save a borrower a total of $13,300 over the life of a 30-year mortgage at 4.5 percent. Or, the $800 theoretically saved would represent about 5 percent of the average mortgage loan down payment of $16,300.
"So, the effect of a current student loan on the decision to buy a house is—or is not—significant depending on the borrower’s other financial resources or how short the borrower is from having enough for a complete down payment," Raskin said.
Raskin said the larger problem when it comes to homebuying is not the money going toward paying student loan debt that could be used for housing, but rather the damage done to the borrower's credit when he or she defaults or is delinquent on a student loan.
"What I call the 'damaged credit' channel may be the most dramatic channel through which to see macroeconomic effects, including in the housing market," Raskin said. "So consider now a graduate who is delinquent or in default. Delinquencies for young adults are particularly relevant, since this is the population of potential first-time homeowners. This delinquency constitutes a negative credit event, which would limit access to credit, making it harder for the potential homeowner to get a mortgage. Negative credit events exacerbate access to not just mortgage credit, but also to other forms of credit. And when delinquencies become defaults, the full weight of the government’s collection efforts drop on the borrower, accentuating the negative credit event of a delinquency."
Despite the amount of data available as to the macroeconomic effect of student loan debt, Raskin said there is still a great deal that is unknown – and without that information, the full macroeconomic effect cannot be measured.
"First, we need to better understand how borrowers view their loan repayment burden," she said. "Is it a function of their total amount owed and the strength of entry-level jobs? Or is it a function of monthly debt payments? What other financial resources do they use? How do they evaluate their different options for higher education? To what extent do they understand all their options for repayment?
"Second, we need to understand more precisely why borrowers reach delinquent or default status. We need to consider ways to reduce unnecessary delinquencies and defaults so as not to impair borrowers’ future access to credit and compromise their ability to avoid garnishment and loss of federal benefits."