A report from Goldman Sachs Research published on Friday, April 17th suggests that while the massive amount student loan debt is a real social and financial problem, even if default rates continue to grow as projected, it will have a notable impact on growth in the residential real estate market but not pose a major risk to the financial system as a whole.

Goldman Sachs analysts Alec Phillips and Hui Shan explain their perspective: “While rising student debt levels pose a greater headwind to homeownership than a few years ago, we remain skeptical that student debt poses a systemic financial risk. The main reason is simply that nearly all of the debt is either held or guaranteed by the federal government, leaving little private sector exposure to defaults.”

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Reasons for rapid student loan growth

Phillips and Shan lay out four reasons for the continuing growth in student loans:

  • College enrollment is up: The GS report highlights that the large cohort of millennials born between 1980 and 2000 moving through are now college­ age,  educational attainment in the population is up, and more people are going to school when the labor market is weak.
  • The percentage of students borrowing has increased: It boils down to more students needing to borrow to finance college education. Moreover, recent data indicates a greater share of marginal college enrollees come from lower-income families. Another factor was the introduction of unsubsidized federal student loans that allow students from middle­ and higher ­income families to borrow for school. Finally the Great Recession and credit crisis reduced financial assets and consumer credit, which led families to greater reliance on government­ backed student loans.
  • College costs are up: The analysts also point out that tuition and educational costs have soared at a rate much faster than inflation.
  • Repayments are down: Repayments are down both because of borrowers taking advantage of income -based repayment, deferment and forbearance programs and due to higher delinquency rates and the fact that defaulted student debt does not disappear in bankruptcy (with a very few exceptions).

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Student loan growth to slow in coming years

Phillips and Shan project that the growth in student loan balances will begin to decelerate in the not-too-distant future. One key reason is that young people are not going to be as interested in going to school as the job market continues to improve. Moreover, enrollment has actually dropped each year since 2011 after moving up sharply in 2009 and 2010. By the same token, the number of adults not in the labor force due to enrollment in school continues to decline and has nearly returned to pre­recession levels.

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Finally, the continuing economic recovery is likely to end the trend of state governments reducing education funding, which could help keep tuition down. They argue “that fewer borrowers will default on their loans and  borrowers should pay down their debt. While there are structural reasons for a continued increase in student loans, the cyclical recovery should slow down their growth in the coming years.”