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What Skyrocketing Student Debt Means For the Economy

A Possible Dark Cloud for Mortgage Credit

The economists at the New York Fed highlighted other implications for the economy in their media conference Thursday.

According to their presentation, average non-student loan balances have declined for all borrowers aged 25 to 30, but the dip is particularly stark for borrowers with student debt balances of more than $100,000.

This likely reflects declining loan demand as well as difficulties in gaining access to credit. Borrowers delinquent on student loans are also likely to be delinquent on other forms of debt.

Student borrowers might also face difficulty accessing mortgage credit in the future. New mortgage rules framed by the Consumer Financial Protection Bureau require banks to ensure that borrowers have an ability to repay their mortgage. One requirement of the rule is that borrowers should spend no more than 43% of their income on loan payments.

Borrowers with huge student loan balances are unlikely to be able to take on a mortgage loan because many will fail to meet the debt-to-income limits. The lack of access to credit will likely limit demand not just housing, but also for consumer goods.

Of course, at least some part of the high delinquency rates can be explained by current economic conditions so if the job market picks up, the rates should decline.

Despite the dire trends in student loans, the economists do note that there is still a strong economic incentive to borrow for education. Americans with a bachelor's degree or higher earn nearly double that of high school graduates. Unemployment rates for those with a college degree are also lower.

-- Written by Shanthi Bharatwaj in New York.

>To contact the writer of this article, click here: Shanthi Bharatwaj.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.
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