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Rising student debt could hurt US economy – Fed president

To pay off the debt, Muneed Ahmad moved into his brother's one-bedroom apartment, where he slept on a mattress on the floor in his lounge. Source: Shutterstock

Rising student loan debt in the United States could ultimately hurt overall home ownership and consumer spending, and erode the ability of colleges and universities to elevate lower-income students, a top Federal Reserve policymaker said on Monday.

New York Fed president William Dudley, an influential monetary policymaker who was citing research from his institution, pointed to rising costs of higher education and student debt as culprits in the troubling trend.

Overall US household debt is expected to surpass its pre-recession high later this year. Proportionally, Americans have shifted away from housing-related debt and toward auto and student loan debt, with aggregate student loan balances US$1.3 trillion at the end of last year, up 170 percent from 2006.

Dudley, whose Fed monitors economic indicators but who does not have any control over fiscal policies like college funding, noted overall delinquency rates “remain stubbornly high” and repayments have slowed, even while the job market improved in the last few years.

There are “potential longer-term negative implications of student debt on homeownership and other types of consumer spending,” he said at a news conference.

“Continued increases in college costs and debt burdens could inhibit higher education’s ability to serve as an important engine of upward income mobility, (and) these developments are important and deserve increased attention.”

The New York Fed data showed a shift among lower-income borrowers to auto and student loans, and away from mortgages, and that higher debt levels bring about lower homeownership rates.

Dudley said sharp rises in the value of housing and stock prices, jobs growth and moderate strength in wages mean, overall, “the household sector’s financial condition today is in unusually good shape for this point in the economic cycle.”

He did not comment on interest rates in his prepared remarks.

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