Fitch: Rising Student Debt Raises Big Questions for U.S. Economy

Fitch Ratings, New York, said a confluence of rising student debt, stagnant income growth and tight lending standards facing U.S. millennials raises significant questions for long-term consumption patterns, savings rates and the economy as a whole

The Fitch report, Falling Off the Generational Wealth Ladder, said the resulting financial barriers to home ownership in particular could have multiple long-term sectoral and economic implications. Fitch said ongoing increases in student debt to record levels, combined with low income growth, could be key factors constraining home ownership and may weigh on long-term consumption growth.

“By deferring home buying and renting for longer, millennials will be placed outside the more traditional path of home equity creation,” said Fitch Senior Analyst Bill Warlick. “If this trend continues, shifts in millennials’ consumption patterns, savings, personal wealth and economic choices could have significant economic and credit implications over the long term.”

The report noted home ownership rates have been falling since before the financial crisis in 2008-2009. The decline for under-35s has been particularly large, with the rate falling to 34% in 2016 from 41% in 2000. At the same time, average student debt hit a record-above $30,000 this year, while the number of individuals with student loans reached 42 million, according to the U.S. Department of Education.

Warlick said income growth has not kept pace with the rise in student loans or housing costs. “Home ownership has long been a key vehicle for lifetime wealth creation and a major driver of the economic cycle and consumption in the U.S.,” he said. “If this were to change, even marginally, it could have significant long-term effects on the economy.”

Fitch’s comparison of cash flows for two hypothetical recent college graduates showed a monthly student loan payment of $203 per month–the 2016 median according to the Federal Reserve Bank of Cleveland–would result in $45,000 less in mortgage loan capacity.

“If housing-based wealth expectations were to fall, it could require an increase in financial savings to build wealth,” the report said. “This too will be increasingly difficult should current trends of wage stagnation persist, while rents and student loan balances continue to increase.”

Fitch noted the U.S. personal savings rate–savings as a percentage of disposable income–fell steadily for decades from the 1970s to the mid-2000s but has begun to rise since the global financial crisis.

“Broadly, this could be a net negative for consumption, which in turn may be a factor limiting the structural economic growth rate of the U.S.,” the report said. “It also could exacerbate changes in spending away from housing-based durable goods to services and leisure. Since these trends would reflect longer term generational changes and the potential effects will develop over a multiyear horizon, the immediate credit implications at the sectoral level are likely to be limited.”