Is Student Debt Prolonging the Recession?

Numerous people have proposed that forgiving student loan debt would act as a fiscal stimulus, and a SignOn.org petition created by Robert Applebaum of ForgiveStudentLoanDebt.com is available to sign if you agree and are interested in sending that message to President Obama and Congress. But there is also an argument that the nearly $1 trillion in student loan debt is slowing down economic recovery, primarily by constricting the still struggling housing market.

Because we're not economists, we're following Robert Reich, a chancellor's professor of public policy at the University of California—Berkeley, who notes that consumer spending is 70 percent of the U.S. economy and that houses have traditionally been the major assets of America's middle class. Those assets are in freefall.

According to Reich, purchases of new homes are down 77 percent from their 2005 peak, overall home sales are still dropping, and prices are still falling. And at the same time,

[y]oung couples are no longer buying homes; they're renting because they're not confident they can get or hold jobs that will reliably allow them to pay a mortgage. Middle-aged couples are underwater or unable to sell their homes at prices that allow them to recover their initial investments. They can't relocate to find employment. They can't retire.

The negative wealth effect of home values, combined with declining wages, makes it highly unlikely the US will enjoy a robust recovery any time soon."

There's no doubt that young people are not buying homes in the numbers they used to. As Bloomberg Businessweek noted in a recent article, only 9 percent of 29- to 34-year-olds got a first-time mortgage from 2009 to 2011 (compared with 17 percent 10 years earlier) and 25- to 34-year-olds made up only 27 percent of all home buyers in 2011, the lowest share in the past decade.

But according to the article, it's not just the precarious job market that is deterring young couples from buying homes. Student debt is preventing many young people from qualifying for mortgages even if they have jobs.

And those first-time homebuyers are key to reviving the housing market. According to Rick Palacios, a senior research analyst at John Burns Real Estate Consulting, it's because they allow current owners to move into larger, pricier homes. "Move-up buyers need somebody to purchase their homes to move," he says. "You need that first leg in the recovery to materialize." 

Of course, the problem is broader than just home sales. According to this New York Times article, only 950,000 new households were created last year, compared to about 1.3 million in 2007, as increasing numbers of new graduates decide to live with their parents rather than forming their own households. Each new household normally adds about $145,000 to the broader economy.

A recent report from the National Association of Consumer Bankruptcy Attorneys (NACBA) titled The Student Loan "Debt Bomb": America's Next Mortgage-Style Economic Crisis? portrays this reality starkly:

… as with the mortgage foreclosure crisis, the staggering amounts owed on student loans also will have repercussions for the broader economy. Just as the housing bubble created a mortgage debt "overhang" that absorbs the income of consumers and renders them unable to afford to engage in the consumer spending that sustains a growing economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future."

What should not be lost in this discussion of the overall economy—especially following the recent Student Debt Week of Action—are the real people behind this crisis whose opportunities to pursue the careers of their choosing, to save for retirement, or simply to rent their own apartments are being curtailed by their student debt burden. Nor should we forget the increasing number of people who face the severe consequences of delinquency and default—which include harassment by third party collection agencies, garnishment of wages, seizing of tax refunds or Social Security, and denial of eligibility for new education grants or loans—or those who are forced to drop out of school before they receive their degree.

And if you or somebody you know is struggling with student debt, remember that there are programs that can help, especially with your federal loans. We cover programs like Income-Based Repayment and Public Service Loan Forgiveness in depth in our free student debt relief webinars. We'll also keep you updated on new developments such as President Obama's recent initiatives through this blog, on Twitter, and via Facebook. 

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works' educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.

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