Student loan debt holders less likely to take on new loans
Student loan debt has been a hot topic of discussion in recent months. Students headed into college are being prompted by their parents to do serious comparison shopping when considering which college they want to go to, and post graduates are coming to terms with repayment plans and steep interest rates at a time when job prospects aren’t all that promising. Recent research shows that the increasing number of people with student loan debt has actually decreased the amount of debt they hold in other areas.
Research from the Federal Reserve Bank of New York reveals that from 2008 to 2012, individuals with student loan debt strayed away from taking on other forms of debt such as mortgages and automotive loans. The numbers show that from 2003 to 2009, thirty-year-olds had significantly high rates of homeownership, but beginning around 2009, those rates dropped substantially from approximately 33 percent in 2009 to 22 percent in 2012.
Similarly, data from the automotive industry shows that 37 percent of twenty-five-year-olds with student loan debt also had auto loan debt in 2008 – that percentage dropped to nearly 30 percent in 2012.
Why the decrease in other areas of debt?
Authors of the report point to the competitive job market as one factor. Recent graduates are starting to come to terms that a lot of people are looking for jobs right now and it’s not as easy to get the position they want. In order to compensate for that uncertainty, people in their mid-20s are curtailing big purchases and opting to drive the car they already own, or pay for one outright rather than take out an automotive loan. Many are also deciding to rent rather than take out a mortgage as the latter is a huge financial commitment.
However, it’s also important to point out that the decline in other areas of debt likely has to do with the strict underwriting standards of financial lenders as well. Because more students are taking out college loans, and more specifically, taking out loans for higher amounts, lenders may deny them for automotive and home loans because their debt to income ratio (DTI) is too high.
Additionally, an increasing number of people with student loan debt are defaulting on their loans, which makes it even harder for them to secure funding for a car or home. If more people continue on the trend of taking out significant education loans without having a plan to consistently pay down these balances, the home and automotive finance industry will continue to take a hit and need to find other target demographics to market to.