Are student loans as big of a problem as people think?
Melissa Cefalu, a veterinarian, and her husband Andrew, a chiropractor, have their dream jobs. But they're living a nightmare of self-denial.
Buried under $365,000 of student loan debt, they never take vacations, instead snatching occasional long weekends with friends or relatives. Andrew drives a 13-year-old Chevy Tahoe. And rather than buy new clothes, Melissa, 35, makes do with her sister's hand-me-downs.
"Every penny is accounted for" even though the couple's combined salary is $125,000 and they live in the affordable town of Madison, Miss., Melissa says. "I love what I do but … I don't feel my degree was worth the sacrifices we have to make every single day."
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Many analysts say the nation's record high $1.34 trillion in student debt is also casting a long shadow over the economy, delaying home purchases, crimping consumer spending and inhibiting business formation. As President Trump sets out to juice an economy that has grown a lackluster 2% a year since the recession ended in 2009, these economists count student debt — along with an aging population and weak productivity — as another obstacle in his path.
"EVERY PENNY IS ACCOUNTED FOR"
"It delays the economic life cycle for the younger generation," says Marshall Steinbaum, senior economist at the Roosevelt Institute. "People would have started their economic lives at zero and now they're starting at a negative balance." That, he says, widens the wealth gap and could have "negative consequences (on spending) that reduces (economic) growth."
But with high school graduates poised to enter college later this summer, other economists say the oft-lamented "student debt crisis" is over-hyped.
"You're paying a higher amount but your earnings are also higher," says Mark Zandi, chief economist at Moody's Analytics.
No one disputes that heavy student debt loads have become more prevalent as tuition has skyrocketed and budget-strapped states have doled out less money to public universities. Since 2007, total student debt has nearly tripled while the number of people with loans has climbed to 44 million from 28 million. The Great Recession prompted many young adults to stay in school longer, while many older laid-off workers returned to college.
In 2015, nearly 70% of college seniors graduated with student debt, up from less than half in 1993, and their average tab had tripled to $30,100, according to the Institute for College Access and Success. All told, about 20% of American adults and 35% of Millennials are burdened by student debt, according to a 2015 Gallup poll.
Wages have not kept up. From 2007 to 2015, average student loan balances surged 60% while average pay for recent graduates rose 13%, FitchRatings says. About 8 million borrowers are in default on their loans, damaging their ability to rent apartments, buy cars and even get jobs.
The biggest toll is in the housing market, some experts say. The homeownership rate for Americans under 35 fell to 34% last year from 41% in 2000. The trend has hurt housing construction — and prevents Millennials' from building wealth that spurs more spending.
Based on a 3.5% mortgage rate, a home buyer shelling out $203 in student loan payments each month can afford $45,000 less in mortgage than a buyer without student debt, Fitch Ratings says. Student debt makes it harder to save for a down payment and make monthly mortgage payments.
"It all adds up to a pretty grim picture for first-time home buyers," says Bill Warlick, a senior analyst for Fitch.
First-time buyers, who typically drive growth in the housing market, make up 32% of all existing home sales, down from a prerecession level of 40%. Student debt "will be a big shadow that prevents a return back to normal" for at least several years, says Lawrence Yun, chief economist of the National Association of Realtors.
Graceanne Hillyer of Olathe, Kan., has$70,000 in college loans and her husband, Nathan, has $30,000. For several years, the couple, who work for the same insurance company, have tried to set aside $200 to $500 a month for a down payment. But despite total household income topping $100,000, the task is more formidable because of their combined $1,100 in monthly student loan bills.
"A lot of people our age already have houses," Graceanne says. She says the couple has only basic cable and she grudgingly rejects her husband's pleas to buy new electronics such as a larger flat screen TV. "I said maybe we can get that when we get ahead of the game," she says.
But all isn't lost. The Hillyers expect to have enough saved for a down payment in two years. A Federal Reserve study found that student debt delays home purchases for adults in their 20s, but by age 30 to 34, the homeownership rates of college grads with and without student debt are nearly identical at about 42% and well above the 30% for those with no college. In other words, the benefit of a college degree on homeownership seem to be deferred, but not squashed, by student debt.
Yet the financial strain also affects consumer spending, which makes up about 70% of economic activity. The share of household outlays accounted for by Americans under 35 fell steadily from about 16% in 2007 to 12.8% in the fourth quarter, according to Moody's and government figures.
"It has impacted the affordability of the American dream — from car purchases to home purchases to starting a business to saving for retirement to paying for medical care and cell phone service," says Natalia Abrams, head of Student Debt Crisis, which advocates for borrowers.
What do student borrowers themselves say? Seventy-one percent of non-homeowners surveyed by the National Association of Realtors last year cited student loan debt as the chief factor delaying their home purchases. And among all borrowers, 57% said the debt affected their ability to buy a car, clothing (41%), and entertainment (43%), and to start a small business (33%).
ARE STUDENT LOANS HURTING NEW BUSINESS FORMATION?
The share of new entrepreneurs age 20 to 34 dropped to 24.4% last year from 34.8% in 1996, according to the Kauffman Foundation, which studies entrepreneurship. A nationwide study by the Philadelphia Fed concluded significantly higher student debt in a given county compared to the U.S. average resulted in 14.4% fewer new businesses.
Borrowers find it harder to invest their own funds to start a business, pay expenses before the firm is profitable and get loans, says Arnobio Morelix, Kauffman's senior research analyst. Business start-ups are vital to growth because they tend to hire more workers and devise innovations that increase productivity.
Skeptics argue that the higher earnings that result from college degrees typically more than offset the added debt. Mark Kantrowitz, a consultant on student loans and scholarships, says that from 1995 to 2013, the average debt-payment-to-income share for college graduates ranged from 9.1% to 11%, according to his analysis of federal data. He says perceptions of a student debt "crisis" are colored by the fewer than 1% of borrowers with debts over $100,000, 90% of whom are professionals such as doctors and lawyers who can easily afford the loans.
Matthew Chingos, a senior fellow at the Urban Institute, attributes the hand-wringing over student loans to the growing share of borrowers from wealthier families. He says it's not clear that providing that group relief would help the broader economy.
Many of those squeezed, Kantrowitz says, are college dropouts who are stuck with the debt payments but never realized the fruits of a degree, or graduates who chose less practical majors such as ethics and history. Dropouts are four times as likely to default on their loans, he says, citing his analysis of Education Department figures.
"We don't have a student loan problem so much as a college completion problem," Kantrowitz says.
PERCEPTION OR REALITY?
For Colin King, 24, of Buffalo, the remedy for his student debt woes is to take out yet another loan for more schooling. He pays $150 a month toward $50,000 in loans for Bachelors and Masters degrees in biology. He hoped to be a research assistant, which in his city would pay as much as $55,000. But King earns $34,000 as a lab technician. He has two other jobs, as an Uber driver and adjunct professor, but still can't afford to eat out more than once a month.
So he's seeking another $70,000 in student loans to become a physician's assistant but says the $100,000 starting salary will more than offset the expense.
Mathematical models and budget crunching may overlook consumer perceptions, says Rohit Chopra, a senior fellow at the Consumer Federation of America. He cites the Realtors group study that showed Millennials bemoaning the effects of student debt on their housing and other purchases.
"Sometimes the perception about your financial future is even more influential than reality, Chopra says. "They may qualify to buy a house" but never even try "if they perceive their debt is too big," Chopra says.