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September 03, 2014 at 10:17 AM
Dire predictions that millennials’ heavy student debt load will weigh down the economy in the long term are “largely overstated,” a new PIMCO report says.
A new analysis by portfolio manager Joshua Anderson, product manager Jason Mandinach and housing analyst Emmanuel S. Sharef of PIMCO predicts that the pent-up demand of heavily indebted graduates will act as a catalyst to the U.S. economy over the long term as they pay off their loans and enjoy the higher earnings that come with a college degree.
In order to understand housing market assumptions over the next few years, getting a grasp on the financial trajectory of millennials is important, the analysts write. “We expect millennials’ financial position to improve, and pent-up demand could result in longer-term strength in housing and housing-related assets,” they write.
The traditional progression of growing up, getting married and buying a house has shifted, not disappeared. Anderson, Sharef and Mandinach believe that timing is the issue and that there is no real structural problem. “Over time the economy will overcome the burden of student debt, and pent-up demand for housing could surprise to the upside,” the analysis says.
They also believe that student loan debt will pay off in the future. Comparisons between the rising student loan debt and the residential credit market in the residential sphere of 2008 are oversimplified, the PIMCO analysis finds.
“Growth in housing was driven more by increased speculation and widespread irresponsible borrowing and lending. Rising student debt has mainly been a function of higher education costs and a larger demand base, although speculation does play a role,” the authors write. In other words, it is highly unlikely that the “systemic risks” in 2008 from the mortgage crisis will affect the student loan market.
Student loans open the door to higher education, and higher education, most of the time, means a higher paying job. The unemployment rate for college graduates is 3.2%, compared with 9.1% for people without a high school diploma. “Unlike housing, where rising home equity withdrawals could be used to finance consumption that did not improve the likelihood of loan repayment, education often increases the borrower’s long-term financial capacity,” The authors write.
Over $1 trillion of student loans are held or guaranteed by the U.S. government, which means that there is a possibility that policymakers and government officials could help borrowers with their debt. Mortgage borrowers, on the other hand, obtained their loans from private firms.
