A quick data dump post.
Karl Smith gets this right: “If you look across the demographic survey’s what looks to be the biggest effect of the recession has been to delay adulthood for folks born around 1990. Rather than graduating high school or college and getting their own apartment and their own car, they stayed with or moved back in with their parents. This drove down household formation and drove down the demand for automobiles.” The Census webpage has similar thoughts and numbers. Unemployment is the biggest driver of young people not forming households, and as youth unemployment very slowly comes down we should see household formation pick up.
Or should we? Steve Waldman counters in comments: “One might argue that the funds a young adult born in 1970 would have directed to rent payments and transportation have, for a young adult born in 1990, been redirected towards servicing student debt.”
Meanwhile Businessweek announces: “Only 9 percent of 29- to 34-year-olds got a first-time mortgage from 2009 to 2011, vs. 17 percent 10 years earlier.” (h/t Matt Stoller) Also cited in the Businessweek article, the National Association of Consumer Bankruptcy Attorneys is shooting distress signal flares into the air based on interviews with their frontline members who see young people struggle with student debts.
Can we get any data on this? One initial place to look is the ratio of student debt payments-to-income. How much of income goes to servicing student debts, and how has that changed?
Here’s a current economics journal review, Student Loans: Do College Students Borrow Too Much—Or Not Enough? Spoiler alert: they think not enough. What surprised me is how thin the “not enough” data is on the month-to-month (as opposed to lifetime frameworks). Review:
There is little evidence to suggest that the average burden of loan repayment relative to income has increased in recent years. The most commonly referenced benchmark is that a repayment to gross income ratio of 8 percent, which is derived broadly from mortgage underwriting, is “manageable” while other analysis such as a 2003 GAO study set hte benchmark at 10 percent…the student would need an annual income of about $25,456 [to handle a $212 monthly student loan payment]…Overall the mean ratio of student loan payments to income among borrowers has held stead at between 9 and 11 percent, even as loan levels have increased over time (Baum and Schwarz 2006; Baum and O’Malley 2003).
(I get annoyed with economists’ indifference between a college wage premium driven by increasing college wages versus declining non-college wages, especially as tuition costs are rising. But that’s for another day.)
The 2006 Baum and Schwarz study cited finds that there are two trends – rising debt but steady student debt-to-income ratios – and that the “contrast in these two trends can be attributed to a combination of rising earnings, declining interest rates, and increased use of extended repayment options. Studies of loan repayment in the United States in 1997 and 2002 revealed that while average total undergraduate debt increased by 66 percent, to $18,900, average monthly payments increased by only 13 percent over these five years. The mean ratio of payments to income actually declined from 11 percent to 9 percent because borrower.”
But that study ends in 2002. Has anyone done an analysis on this since? I can’t find one, so we’ll have to do a back of the envelope one.
Heidi Shierholz, in new college grads losing ground on wages, shows the rising earnings of new college graduates in the late 1999s that end up driving the 2006 Baum and Schwarz study above. However, according to Shierholz, since 2003 entry level college graduate wages have been flat. Meanwhile, average undergraduate
tuition student loan debt has gone from $18,900 (according to above) to $24,800 (according to Demos). That’s an average loan payment increase of about $60/month, from $228 to $285.
If monthly student debt-to-income was 9% with $18.9K debt, then the average monthly student debt-to-income with no increase in income and $24.8K debt is 11.25%. Notice that is above the 10% GAO “healthy” student debt ratio and impacts many more people as a percentage of the young. Now interest rates are lower and payments can probably be stretched out; however unemployment is higher for recent college graduates (and their parents), so income is also going to be a bit lower. Let’s say they cancel. We also know that graduating into a recession has a long-lasting impact on wages, so let’s assume students don’t expect a rapid rebound in wages once they start working.
So now the practical questions becomes: how much an average increase of 2.25% of student-loan to income payments, that extra $60/month, impacts how twenty-somethings move out of their parents house? I’d be interested in arguments, but I can’t imagine it’s going to be the breaker for a large percentage of the population. And I imagine it is a weaker determinate than, say, credit-card debt incurred during joblessness on the balance-sheet front. I’d like to see more arguments, but at this point I don’t see student debt putting a pickup in household formation in check – it will decline a bit than it would otherwise, but young people might equally just spend less on housing and rentals to balance out their monthly debt ratios.