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Student debt: What does it mean to banks, consumers and the US economy?

Mar 15, 2012 Walt Wojciechowski

Consumers are beginning to rack up debt on their credit cards, reflecting renewed confidence in the economy and a larger volume of discretionary income. However, many economists are warning that the trend may soon evolve into a consumer debt crisis, driven primarily by swelling student loan balances. The Federal Reserve Bank of New York released a report last week that shows a mere 39 percent of student loan borrowers paid debts during the third quarter of 2011. The total volume of student dues hit $867 billion at the end of 2011 - more than both credit card debts and auto loans. That figure is particularly striking considering the fact that Americans racked up roughly $48 billion in new credit card debt throughout last year - a 424 percent hike over the previous year and 577 percent more than in 2009, according to a recent CardHub study. Wall Street Journal contributor Phil Izzo points out, however, that student loans are unique in that they need not be paid off immediately, so current student are incurring debt while not necessarily paying any of it off. Student loans also allow forbearance periods for recent grads or times of economic hardship. Also, unlike the housing market, student loans cannot be discharged through bankruptcy. "Of course, that's the nature of student debt and many may never have a problem paying it back," Izzo writes. "Surely, when Ben Bernanke's son, for example, gets his medical degree, he expects to pay off his $400,000 in loans. But not everyone will graduate a doctor. The job market is toughest for new entrants, and young workers have faced the largest pressure on wages." Some analysts have compared the swelling student debt volume to the early stages of the housing bubble, but Izzo rejects that concern. One reason is because banks and alternative credit providers are less exposed as they were during the mortgage crisis. Ironically, Izzo notes, the large volume of student dues may end up exacerbating the housing crisis, as many young graduates hold off on buying a home in order to pay off debts. "The student debt crisis isn't like other debt crises," writes Jordan Weissmann for The Atlantic. "It won't sink a currency, like Europe's sovereign debt crises. And it won't suddenly topple the U.S. economy, like the mortgage crisis. But give this crisis enough time, and it might just drag down the middle class."