This is so important. US Student Debt is inherently different from housing, and thus, a huge crash a la 2008 is unlikely. Understanding the currentâand potentially futureâstate of the global economy helps investors put market movements into context. To promote that understanding, researchers from Vanguard Investment Strategy Group examine the economic trends that affect the investing environment in this new series. Below is the second of their insights into Global macro matters. It is also available as a PDF file (link below). U.S. student loan debt now exceeds $1 trillion In an environment of broader U.S. consumer deleveraging, student debt is the only form of consumer debt that has risen since 2007, having doubled since the recession. Both the number of borrowers and average debt balances of student loans have increased more than 70% since 2004 (source: Federal Reserve Bank of New York). Factors in this rapid increase include higher tuition costs, the deep recession, and overall demand for higher education. Chart: Student loan debt has doubled since the recession Macro view: Student debt growth too small to repeat debt crisis like that of 2007â2009 Size matters. At 7% of U.S. gross domestic product, student debt outstanding is a fraction of the size of mortgage debt to GDP, which peaked in 2007 at 62%. Student loan debt lacks the financial interconnectedness of some types of mortgage debt, too. For instance, total student loan asset backed securities (ABS) represent less than 2.5% of total mortgage-backed securities (MBS) in 2007. Also, student loans are recourse loans, meaning borrowers cant walk away from the payment obligation. Chart: U.S. student debt today versus mortgage debt in 2007 Micro view: Student debt matters for housing market, as does education According to our estimates, all else equal, student debt lowers the probability of owning a home in ones lifetime by â1.5%. The increase in student loan borrowers from 2008 to 2012 lowered U.S. housing demand by approximately 36,000 homes per year (or 3.5% of first-time home buyers) over that time. However, this drag on the housing market should be compared with the positive housing demand associated with higher levels of education and, on average, income. Although financing a bachelors degree with student debt decreases the likelihood of a typical 30-year-old college graduate purchasing a home by â1.7 percentage points, obtaining that degree also increases the likelihood of purchasing a home by 12.9 percentage points, relative to not attending college at all. Chart: Homeownership rate for typical 30-year-olds with varying student debt status The return on education Although all segments of the U.S. labor market have suffered over the past several years, American workers with higher levels of education have, on average, notably higher income levels and lower jobless rates. If anything, these differentials have widened over the past decade. In an ever-more-competitive global economy, one could argue not only that returns on greater education and skills attainment will remain high in the future, but also that they may in fact increase over time. Chart: U.S. student loan debt is associated with the benefits of higher educational attainment Read PDF Note: All investments are subject to risk, including the possible loss of the money you invest.
Posted on: Wed, 03 Sep 2014 21:30:00 +0000
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