Student Debt Almost Triples Since 2005, “Domino Effect” on Economy Feared
A week after the Consumer Financial Protection Bureau (CFPB) announced that they would be investigating refinancing options for private student loans to prevent a detrimental “domino effect” on the economy, the New York Federal Reserve has issued a report finding that student debt has almost tripled since 2005.
The total amount of student loan debt was $966 billion at the end of 2012, and marks a 70% increase in both average debt load and number of borrowers. The number of loan recipients who are past due on their repayments has also increased drastically, going from 10% in 2004 to 17% in 2012.
An earlier report, also critical of the effect that student debt will have on the economy, found that the average debt load per recipient has grown from $17,23 to $27,253 in the same time period, and that the number graduates with outstanding loans has also increased, rising from 12 million in 2005 to 26 million in 2012.
The report also details that the effects of the increased debt load for college students and graduates has already been seen, as fewer student loan recipients have bought homes in that time period. The amount of new mortgages taken out by student loan recipients aged 25-30 has fallen by over half, specifically from 9% in 2005 to 4% in 2012.
“The higher burden of student loans and higher delinquencies may affect borrowers’ access to other types of credit and the performance of other debt,” the report found.
Last week, CFPB Student Loan Ombudsman Rohit Chopra announced the formation of a new inquiry to help alleviate private debt load and help prevent further damage to the economic recovery effort.
“If you think everything in this market is hunky-dory, you are completely missing the warning signs,” CFPB Student Loan Ombudsman Rohit Chopra said in a call with reporters on Thursday. “Many of us have raised questions about the student debt domino effect on the economy.”
Previous reports by the CFPB has deemed that the growing student loan crisis bears an “uncanny resemblance” to the subprime housing market that sparked the 2007 recession. Additionally, the CFPB stated that Congress should amend federal law in order allow for private student loans to be discharged through bankruptcy. Currently, private student loans are the one form of debt that cannot be removed through a declaration of bankrupty.
“We will be analyzing plans for policymakers to consider that might help avoid a repeat of the mortgage meltdown for today’s student loan borrowers,” CFPB Director Richard Cordray said in a statement.
With the sequester set to take effect today, the report highlights the need for a better system of student loan repayment and forgiveness as automatic budget cuts will result in up to 280,000 students losing all access to financial aid.
“I don’t like to use the word ‘crisis,’ because it’s a ‘crisis’ that really can’t melt down the same way that the mortgage market did,” Chopra said in an interview with HuffPost Live. “In fact, a lot of the student loan issues are just going to be a drag on the economy, because young people aren’t going to be able to participate like a generation ago when they’re making very large payments out of their salaries every single month instead of putting it to better use.”