The delinquency rate on student loans is soaring. It currently stands at 15%, up from 12% in 2005-2007.
Student loan balances are also surging, now averaging $27,253, up 58% from 2005. The increase in delinquencies negatively impacts the credit ratings of indebted students. Loan balances decrease overall disposable income until paid in full.
More students are delaying the payment of student loans after graduating. The share of outstanding student loans in deferment or forbearance is now at 51%, up from 44.3% a year ago.
Federal loans are especially susceptible to deferment since they offer longer nonpayment periods than do private loans. Federal loans can be deferred for up to eight years, and private loans just one. 53% of outstanding federal loans (55 million loans) are in deferment, compared to 19% of private loans, as of March 2012.
Worse, the availability of jobs requiring a college degree is declining. Nearly half of all college graduates take jobs that do not require a degree. (Nearly 40% of college graduates work in jobs that do not require a high school diploma.) Further, more workers are becoming overeducated for the jobs they hold, according to a report by the Center for College Affordability and Productivity.
first tuesday insight
New college graduates are a powerful force for the long-term health of the real estate market. College grads still earn significantly more over their lifetime than do non-college grads. The increase in lifetime earnings easily overtakes any other investment, according to a recent research paper by the Federal Reserve Bank of Richmond.
This elevated level of lifetime earnings allows a skilled worker to qualify and purchase a newer and larger home. This is how it should work, anyway.
However, the current batch of debt-laden college graduates are finding themselves financially elbowed out of the first-time homeowner market. The long-term problem? Lenders frown upon the excess debt-to-income (DTI) ratios of recent college graduates. In today’s lending climate with its return to 1970s fundamentals, an unfavorable DTI is more detrimental than any time in the past 30 years.
College graduates lucky enough to qualify for purchase-assist financing are, in the short term, unable to compete with cash speculators. Cash buyers made up 36% of homebuyers in California as of February 2013, more than double the historical rate. Cash offers move to the front of the line – no contingencies for financing, thank you. Presently multiple cash offers are creating frenzied auction environments with sellers of low-tier properties getting more than the listing price.
All this occurs while prospective homeowners wait idly by to receive word that their offer was outbid by a cash investor.
The remedy for the problem of the current generation of college graduates is a strong job market. A strong job market will competitively increase incomes and end deferments, thus lowering DTIs. Recent grads will actually be able to save money for mortgage down payments! Once the college grads gain some financial footing and secure employment, they will be a powerful driving force behind a real estate sales.
Re: “Student-loan delinquency rate hits danger zone, report says” from the Los Angeles Times
Re: “Nearly half of college grads have jobs that don’t require diplomas” from the Los Angeles Times
Re: “More students delay repaying loans” from the Wall Street Journal