Report Raises Questions Over Student Debt Harming Housing, Auto Markets

Published April 19, 2013

Are excessive student loans preventing young Americans from borrowing money to buy a home or new car? That is certainly one of the conclusions of a recent New York Federal Reserve study, “Young Student Loan Borrowers Retreat from Housing and Auto Markets.”

The findings “may have broad implications for the ongoing recovery of the housing and vehicle markets, and of U.S. consumer spending more generally,” Meta Brown and Sydnee Caldwell wrote in the report.

They did not outright call for student loans to be forgiven as a means of jump starting credit creation and consumer spending, although that certainly appears to be an implication of the findings, if accurate.

Declining With or Without Debt

Perhaps one reason they didn’t is because it isn’t accurate. The proportion of borrowers without student loan debts not entering the housing and auto markets has declined alongside those with student loan debt, just at a slightly slower pace.

In other words, the findings show that whether they carry student debt or not, young people are overall less likely to pull the trigger on a home mortgage or car loan than they were before the recession began in 2008.

So, as burdensome as taking out too much money to go to college is, the real trouble appears to be a broader issue. What might that be?

Falling Participation Rate

Jobs. The population of those with some college or a college degree 25 years old and older has increased by nearly 11 million, but only 4.7 million entered the labor force as the participation rate declined from 74.9 percent to 72.02 percent, according to data compiled by the Bureau of Labor Statistics

If the participation rate had just held steady, there would be an additional 3.4 million people in the labor force, resulting in an 8.5 percent unemployment rate instead of the 4.9 percent reported rate for those with some level of college education.

Those without any college education are not entering the labor force either. That alone would explain the drop in demand for credit. How are the jobless supposed to make monthly payments without incomes? Why would they take out loans now when the risk is so high?

In fact, young people are not alone in this regard.

Overall, since 2009, the civilian non-institutional population has increased by 10.2 million, but only 796,000 have joined the civilian labor force.

Worst Rate Since WWII
That is the worst population absorption into labor markets since World War II, and back then the only reason labor markets were shrinking was because men were being deployed overseas and thus not counted. Otherwise, typically 59 percent of the population was absorbed into the labor force, not the paltry 7.7 percent rate seen today.

While Baby Boomers retiring would be expected to lower the labor force participation rate, the civilian non-institutional population of those 65 years and older has only increased by about 5.2 million since Obama took office. But even then, the labor force participation rate for those 65 years and older has actually increased, from 17.2 percent to 18.8 percent.

That actually indicates older Americans are working longer and not entering retirement, which makes sense as their savings have evaporated in the blink of an eye.

And somehow more debt is supposed to help the economy grow. It never made any sense. Too much debt wrecked the economy. As a result, folks cannot find work, and those who are working cannot afford to retire. And then the eggheads at the central bank that printed and lent all the money wonder why people are not taking on more debt.

Simply put, if you’re not working, you’re not going to have a way to pay off a mortgage. The problem is not that young people carry student loan debt, per se, although it is burdensome, it’s that without jobs they could not take out more loans if they wanted to.

Falling Value of College

As for those with student loans, the New York Fed reports they are now less likely than those without student loan debt to take out a home or auto loan, and have much lower credit scores.

All of which means the value of a college education is rapidly dropping and the debt associated with going to college is becoming riskier to take on. That does not advise student loan forgiveness, it advises that there be less student loans given to fund big education in the first place. Especially in this jobless recovery.

Unlimited government financing to grow credit is not helping people, it is destroying lives. It wrecked the economy via the housing market, wiped out the Baby Boomers’ retirements, and now it’s draining an entire generation of its future. When will we learn?

Robert Romano ([email protected]) is the senior editor of Americans for Limited Government. Used with permission of