Most people know better than to read through the Congressional Budget Office’s annual “Budget and Economic Outlook,” which was released last week. Not me, though.
Student loans play a subtle roll in these kinds of reports, and this year’s offers an interesting twist. In Appendix A, which concerns the changes since August to the CBO’s baseline projection, on page 113 (pdf 119) it states:
CBO increased its projection of outlays for federal student loans by $39 billion over the 2015–2024 period. That increase is primarily attributable to higher projections of participation in repayment plans that are based on a borrower’s income. Under those plans, the government forgives the loans of borrowers who meet certain criteria, so they cost more than other repayment plans.
Yeeouch.
Don’t worry too much though, the office still believes that there’s an overall negative subsidy to the student loan system thanks to its accrual accounting methodology. I’m a rare liberal who thinks fair-value accounting works better. I think the opponents of FVA confuse the government’s enormous borrowing power with the belief that it never spends money recklessly.
The CBO’s specific estimates of the federal student loan system will be out later, but I suspect this stray statement will be used by Wall Street Journal types to argue that IBR/PAYE is a “debt forgiveness program” for wastrel college students rather than a monthly payment reduction program that it’s largely intended to be. At least people can’t say that it’s a student debtor shakedown to extend standard repayment plans. This whole student loan thing is going to get uglier and not end well. I’m not excited about it.
Shifting gears, another place student debt rears its hideous visage is in household formation. On page 36 (42), the CBO tells us that “[S]tudent loans have rendered some young adults unable or unwilling to obtain a mortgage.” Brookings Institution people, take note.
But for some reason the CBO thinks household formation will surge ahead.
The CBO’s only reason for optimism is “better prospects for jobs” and easier access to mortgages, yet it concedes that in recent years household formation has not been linked to employment gains as it has been in the past.
Looking at the employment-population ratio for 25-54-year-old Americans, there’s but slim reason to be hopeful. It’s risen two percentage points since October 2011, but it needs to go up five more points to return to its 2000 peak. I don’t think the current trajectory is compatible with rapid growth in household formation. On the other hand, two percentage points is probably more than I would’ve predicted a couple years ago.
Without new households, vacancy rates will stay high (though there are regional variations I’ll not speculate on at this time), so expectations of higher future land values will stay suppressed. This doesn’t bode well.
The Last Gen X American 
It’s more can’t than unwilling! We looked into getting a very modest mortgage ($100k) and were shocked to find that our IBR wasn’t treated like other minimum payments at all. The mortgage bank has to contact the student loan lenders to obtain what your monthly payment would be if not in IBR and use that number instead of what you are actually paying. If mortgage lenders keep that up, it’s going to be really hard for any couple (like us) who have two sets of college loan debt and had no parental contributions to educational costs.
I had never heard about that happening. Thanks for writing, Claire.
Sadly I am finding that when applying for a mortgage and you are on the IBR, you won’t be able to get a home at all. The lenders will use a number between 1%-5% to deteremine your monthly payment; which in most IBR cases is not even close to what it actually is. We can show 1 yr of what our payments are going to be and I guess the trick is finding a home and closing on the renewal date. Unfortunately, how many people are going to be able to find a home they actually like and close on that date? I have been looking for 4 months and still haven’t found anything I like. I have1 week or else I will not be able to get a home for another year, or at all.
There has got to be some way for the lenders and the government to work together to give potential homebuyers on IBR a chance….