Yves Smith — The Burgeoning Student Debt Problem

Even though other consumer debt-bombs have done more damage, student debt is producing significant social and economic distortions. One is so useful to the authority structure that it seems certain that they will keep this type of bondage in place. Heavy debt loads pressure young people into making conservative choices. If you carry a lot in the way of student loans, you have to worry about employability. That doesn’t simply push graduates into bigger ticket (hence more conventional) career choices; more important, it makes them far less likely to step out of line. In particular, an arrest record, which is often a by product of protesting, is an automatic out with a lot of employers.

But the level of student debt, now estimated at over $1 trillion outstanding, is having an impact on spending. First time home buying is running below the level expected given new household formation, and a big culprit is student debt loads, since many young people are too leveraged to take on a decent-sized mortgage on top of their existing obligations. In addition, the 25 to 39 year old cohort is the top target of advertisers, but the more debt service they have, the less they can buy in the way of goodies.

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The Burgeoning Student Debt Problem

by Yves Smith

The next debt bomb? Even if not, it is structurally altering the economy in a way that postpones demand for major economic drivers like housing. The housing recovery is already weak; in fact, the bottom is not yet in. Dr. Housing Bubble, for example, has been warning about student debt as a drag on the housing recovery and one that is likely to persist until some solution is implemented.