Presidential candidate Elizabeth Warren recently called for cancelling up to $50,000 in student loan debt for 42 million Americans. Then real estate firm Redfin did an analysis of how that would impact the housing market. Here are a few thoughts on the matter.
– On systemic risk…
– Student debt won’t cause the next financial crisis. The $1.49 trillion in outstanding student debt sounds big in headlines, and while the default rate is a pretty uncomfortable-sounding 9.54% in 1Q19, most defaults are on balances less than $10k.
– Also to put this into perspective, there is $9 trillion in total mortgage debt, and about $1.6 trillion in new mortgage volume funded each year. While this market is way larger than student loans, the 1Q19 default rate is super low at 1.10%. Most mortgage paper originated since the crisis is pristine, so this rate should hold as long as mortgage approval standards remain disciplined.
– Having said all that, this Redfin chart does show how student debt slows down spending and delays big purchases like homes. It pumps the brakes on the economy, but won’t break the entire machine.
– On homebuying takeaways for kids my age…
– Yes of course I’d be happy to let the government pay off my loans.
– And according to Redfin, I’d be able to buy a home 3 years sooner.
– But I don’t think I’m alone on two points: (1) this isn’t a totally realistic thing to expect, and (2) therefore it’s all about trying to grow skillset and income.
– So I’m not sure it makes a huge difference in life. The main focus is working and growing the old fashioned way.
– As for how it might impact the system if it did happen, we can expect more bidding wars and homebuyer competition, but I suppose that would be a good problem if we all suddenly had zero (or way less) student debt.
– Will revisit this as the political cycle matures.