Why Rising Student Debt Could Signal Growth for Housing

An analysis of government data by the ""National Association of Home Builders"":http://www.nahb.com/ revealed another issue that can be added to the list of economic changes caused by the housing slump: Rising student loan debt.

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Data shows that the onset of the housing crisis brought with it an increase in students taking out loans for higher education. Since the third quarter of 2008, student loan debt has increased by 47.9 percent ($293 million). This increase is attributed to the drop in the availability of home equity loans, which are often used by homeowning parents to finance their children's education.

""The rising student loan debt problem is another consequence of the housing downturn,"" said NAHB chairman Barry Rutenberg. ""As more and more parents face tighter budget restraints as a result of lower home values, this is forcing an increasing number of students to take out loans for tuition, essentially shifting some of the burden of paying for college from parents to students.""

The link between the start of the housing slump and the rise in student loan debt follows a recent report from the Federal Reserve showing that the country's household wealth fell nearly 40 percent from 2007 to 2010 as a result of declining home values.

While student loan debt has risen, NAHB's analysis dismissed speculation that loan delinquency could spell disaster for housing and the economy. The 90-plus day delinquency rate on student loans has increased 42 percent since Q3 2008, but it is a relatively small increase compared to delinquency rates on cars or mortgages, and the current 90-plus day rate of 8.69 percent still stands below crisis levels.

""Given the high, but declining, levels of unemployment for younger people, it is possible that the number of troubled student loans will rise over the short-term, but it is likely an exaggeration to liken the current situation to a new economic bubble waiting

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to burst,"" said the report.

After extrapolating from 2009 IRS data and factoring in increases in enrollment and debt, the report estimated that for households with an adjusted gross income (AGI) of $30,000 or less, student loan payments can take up 25 percent or more of household income.

A figure that high would certainly drive down housing demand, the NAHB concluded. However, for households that have a higher AGI (approximately two-thirds of student loan debt deduction claimants), loan payments represent a significantly smaller share of the household's income and would likely have little effect on demand.

""So the IRS data and the Fed data on delinquency rates suggest that student loan debt burdens are, for the most part, not going to have a massive effect on housing demand. This is not to say that there are not cases where individuals obtain very large amounts of student loan debts and then have trouble finding a job or a job with sufficient income to pay those debts. But the data suggest that these cases are the exception, rather than the rule,"" said the report.

The reported also reminded readers of the link between a skilled, educated workforce and housing demand: ""While it is likely the case that some returns to higher education represent signaling, employer preference for educated workers indicates that an educated worker has higher productivity. And productivity implies a higher wage.

""This is well known, and data from the Current Population Survey confirm it. In general, the more advanced the degree, the higher the average wage. Moreover, wages are rising faster over time for more educated workers. Higher incomes allow for stronger housing demand. So to that extent, education, even reasonably debt-financed education, is a net positive for long-run housing demand, both rental and owner-occupied.""

The report concluded that the rising student loan debt doesn't represent an increase in borrowing so much as it represents a change in how people are borrowing for college financing. As home equity loans have fallen, student loans have simply risen to match.

NAHB also reminds readers that rising debt is not necessarily a bad thing when the debt is used for investment purposes-for example, an advanced education.

""More fundamentally, it would be a mistake to condemn the attainment of higher education itself, and even debt-financed higher education, as bad for the economy and housing demand. The data show that education continues to result in higher wages, which is good for housing,"" said the report.