Monday, February 23, 2015

Student Loans are Harmful to Home Sales, the Financial Health of Young Americans and the Rest of Us Too

People often treat student loans as if they are 'free money.' Nothing could be further from the truth.

In fact, people often treat loans of any kind as if the principal amount will never need to be repaid. That too is non-thinking of a harmful kind.

High student debt equals fewer home buyers tells of the connection between high student loans and the lack of a robust housing market today and probably down the road as well:

"Going to college usually leads to better jobs and better pay, but it’s also left many people dangerously in debt and unable to buy a house years after they leave school. . . .

The percentage of student loans at least 90 days overdue rose to 11.3% from 11.1% in the final three months of 2014 . . . .

While delinquencies have fallen from a record 11.8% in 2013, they are still almost twice as high as they were 10 years earlier.

Then . . . the government reported that construction of new homes fell slightly to a 1.06 million annual pace in January. While sales have been rising gradually, they still aren’t increasing nearly as fast as expected almost six years into an recovery. And the percentage of buyers purchasing their first home is still unusually low.

In a fully functioning economy, housing starts should be running around 1.4 million to 1.8 million a year, analysts estimate.

Clearly the weight of student loans is too heavy for many young people to buy a single-family home. Many can’t qualify for a loan in an era of tougher lending standards or afford the monthly cost of a mortgage. . . .

What’s worse, a higher percentage of students failed to graduate from college, so they are not earning the kind of money that a degree typically brings. They’ll have an even tougher time paying off debt.

Then there’s the so-called boomerangers. Far more 25- to 30-year-olds live with their parents compared with the years before the Great Recession. Read: Fed study shows boomerang generation no myth.

Now, a college degree is still a very good investment. People with degrees do earn more money and lose their jobs far less. But the ever-rising cost of college also has a downside that harms not only people saddled with large loans but the broader U.S. economy.

Again, look no further than the housing market. The New York Fed recently found that 30-year-olds without a college degree are now more likely to have a mortgage than people the same age who still have student loans to pay off. That didn’t used to be the case.

For most people stuck with college debt, there are few ways out. Student loans cannot be eliminated by filing for personal bankruptcy except under unusual circumstances. The government can also confiscate part of a person’s salary for nonpayment of college debt.

If the situation persists it could have depressing consequences for the economy for years to come .... People in the 30s and 40s entering their prime earning years are typically big spenders on everything from cars to homes to dining out.

Instead some college-educated Americans may find themselves unable to entirely pay off their student loans until their children are ready to enter college."

Summing Up

As a nation, as families and as individuals, too many of us are poor financial managers and too deeply in debt.

The facts are straightforward and simple --- debt isn't free and saving for a rainy day is essential. But net savings can't occur until they exceed outstanding debt.

And without net savings, it's impossible to save and invest properly for our oldster years unless we are going to be satisfied to leave it to the government to do it for us.

America's financial situation is not a pretty picture, and now with student loans freely available to any and all comers, we're drawing too many young Americans into the mess as well.

So here's what I have to say to young people -- beware of burdensome student loans and all others. Keep your eye on savings as well.

That's my take.

Thanks. Bob.

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