The Student Loan Horror You Need to Know


NEW YORK (MainStreet) — It's one thing to avoid buying property because you want to be risk averse in a turbulent economy. It's another to suggest that 20- and 30-somethings may be camping out at chez Mom and Dad, because the idea of buying or even renting while their credit scores are borderline or whacked has left them spooked.

But that seemed to be the message student loan ombudsman Rohit Chopra of the Consumer Financial Protection Bureau had in a speech at last week's ABS East 2013 conference in Miami, a gathering of figures involved in the asset-backed securities market. The recovery in housing, Chopra said, was being hurt more by the student loan crisis than by any other single factor.

"We are already seeing signs of economic drag from student loan debt," Chopra said. "The impact on the housing market is the most troubling part."

Chopra has been crunching the numbers and drawing some conclusions that may or may not have been welcomed by the structured finance wonks in attendance.

"The fact is that student indebtedness impacts the credit profile of first-time homebuyers," Chopra told the Florida confab. "Three-fourths of the fall in household formation can be attributed to younger adults under 34."

As with residential mortgages, the $1.2 trillion a year student loan industry is backed primarily by the federal government.

Overall, the current student loan debt crisis, he said, is harming macroeconomic growth in the larger economy. He also said the industry should seek try to revive the securitization market to help create a more financially responsible industry. The market for securitizing student loans was among the casualties of the 2008 financial crisis, after which most private lenders folded their tents.

At the same time, Chopra did not seem to be a fan of quantitative easing, where the fed buys up US Treasury notes and mortgaged-backed securities, as anything that aids people with student loans. Other consumer loans remain at historic lows, even as the market seems to be entering a climate of rising interest rates. By contrast, rates on student loans have mainly fixed rates of 8% and up and are applied to a much bigger principle than most credit card or auto loans. An estimated 7 million student loan borrowers are in default.

A practical reason that keeps 20- and 30-somethings from buying property is that they simply don't have the cash for a down payment, especially if a lot of their income is going to pay off a student loan. If your credit score is borderline or even fair, the risk of being turned down for a mortgage is that your score could plummet even if you can put 20% down—a lose/lose situation.

The CFPB has said that it is looking to provide solutions for these issues in the future as it plays an increased role in regulating student loans. Chopra suggested that investors and loan servicers cut borrowers some slack on refinancing options.

Jacob Gaffney, executive editor of HousingWire, noted that one conference participant took exception to Chopra's remarks on the state of the industry. "Chopra earlier suggested investors and servicers allow a higher degree of refinancing in the space, considering the high levels of default and the psychological barrier to borrowing," wrote Gaffney in an October 8 blog post. He noted that a conferee told Chopra "in no uncertain terms that if he wants change he should go to Congress instead of blaming student loan financiers."

--Written by John Sandman for MainStreet

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