Debt | timiacono.com - Part 5

Pew Research has compiled a pretty intriguing report on what burgeoning student loan debt is doing to the finances of those young Americans who pursue higher education. There are lots of good charts packed with, sadly, unsurprising data about what a burden this debt is for those just starting out in their careers.

Student debt burdens are weighing on the economic fortunes of younger Americans, as households headed by young adults owing student debt lag far behind their peers in terms of wealth accumulation, according to a new Pew Research Center analysis of government data. About four-in-ten U.S. households (37%) headed by an adult younger than 40 currently have some student debt—the highest share on record, with the median outstanding student debt load standing at about $13,ooo.

An analysis of the recent Survey of Consumer Finances finds that households headed by a college-educated adult without any student debt obligations have about seven times the typical net worth ($64,700) of households headed by a young, college-educated adult with student debt ($8,700). And the wealth gap is also large for households headed by young adults without a bachelor’s degree: Those with no student debt have accumulated roughly nine times as much wealth as debtor households ($10,900 vs. $1,200). This is true despite the fact that debtors and non-debtors have nearly identical household incomes in each group.

I have no idea whether my college loan experience was typical at the time, but back in the early 1980s I had racked up about $7,500 in student loans when I picked up my diploma and began my first job as an engineer making $30,000 a year.

My guess is that most college graduates today who enter the workforce with college loans to service would be quite happy with a 4-to-1 ratio of annual income to debt, which makes paying this off quite manageable. That ratio is probably a lot closer to 1-to-1 today.

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Here’s the data on student loans and home ownership that’s been getting a lot of attention in the last day or so in chart form from its original source at the New York Federal Reserve.

Just in case it isn’t already obvious, many of those youngsters aged 27  to 30 who should be most able to buy property because they went to college and are making more money than they would otherwise are not doing so, in part at least, due to their student loan debt.

What’s really surprising about this is that, over the last few years, the implied home ownership rate of those with student loans has actually fallen below those who have no student loans, a group that, presumably, includes lots of college graduates who got through college with little or no debt along with those who never felt the need for higher education.

Of course, the bigger picture here is that overall home ownership amongst the younger set has fallen precipitously since the financial crisis, dropping by nearly a third, from over 30 percent to just over 20 percent.

According to stories like Too many condos? Canada’s housing growth ‘sustainable’: BMO along with Bubble? What bubble? Toronto condo sales booming once again, both at the Globe & Mail, Canada’s housing market is not a bubble waiting to pop.

But you’d think that something’s got to give at some point after looking at the chart below from this item at the Economist as there has been no real let up in the amount of household debt our neighbors to the north have been willing to take on.

This is a relatively new phenomenon as, based on a cursory review of charts available on the subject, Canada has trailed us spendthrift Americans by a fairly wide margin indebtedness-wise going back at least 25 years.

How this ends up is anyone’s guess, but you’d think that both of those red curves above will, someday, see a major correction that will not be pleasant.

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It’s probably not such a bad thing that, in recent years, it has become much more expensive to get a law degree here in the U.S., at least based on the graduate school debt levels reported in this Wall Street Journal story the other day in the graphic below, but the idea that some of that law school debt may end up being forgiven is somewhat troubling.

Based on the WSJ story, there has recently been a sharp increase in college loans that have built-in maximum payment/long-term forgiveness features and these now account for almost 10 percent of the nation’s $1+ trillion in outstanding student loans.

Also see this commentary on the subject by Megan McCardle at Bloomberg.

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