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Fed Warns Of Student Debt Economic Impact
WASHINGTON (4/22/13)--Unprecedented levels of student debt may be restricting the spending power of young, skilled workers, and, in turn, harming the recovery of U.S. housing, automobile and general consumer markets, Federal Reserve Bank of New York economists reported in a blog post filed last week.

The New York Fed research found that the percentage of 25-year-olds with some level of student debt has nearly doubled, from 25% in 2003 to 43% in 2012.

Average student loan balances have increased by 91% in that period, from $10,649 to $20,326. The post also noted an increase in student loan delinquencies.

While the homeownership rate for 30-year-old student debtors traditionally has exceeded the homeownership rate of those without higher education debt, that relationship changed, falling 10 percentage points by 2012. "Now, for the first time in at least 10 years, 30-year-olds with no history of student loans are more likely to have home-secured debt than those with a history of student loans," the Fed economists wrote. Student loan borrowers may also have issues accessing other forms of credit due to tightening lending standards, and their own high debt-to-income ratios, the said.

The Consumer Financial Protection Bureau has noted that student loan debt, which surpassed $1 trillion in 2012, has exceeded credit card debt as the largest source of consumer debt in the U.S. More than $150 billion of this $1 trillion total is comprised of private student loans, and at least $8 billion of these private student loans are in default, the CFPB said.

To address student loan issues, President Barack Obama in his 2014 budget suggested capping federal student loan repayments at 10% of a borrower's discretionary income and forgiving any remaining student loan debt after 20 years of repayments have been made. The Obama budget also proposed changing the structure of interest rates on federal student and parent loans to reflect prevailing market interest rates at the time loans are made, with rates remaining fixed for the life of the loans.

Interest rates on subsidized Stafford Loans are scheduled to increase from 3.4% to 6.8% on July 1 if changes are not approved.

CUNA estimates that around 300 credit unions currently offer student loans to their members. Credit unions also provide financial education and seminars relating to student lending generally, and encourage students to attend. The website also provides extensive financial education regarding student lending, through both written information and webinars.

In a March letter to the CFPB, CUNA emphasized that credit unions should be given greater latitude to provide student loans to their members. CUNA is forming a student loan advisory group to address these and other student lending issues, and that group plans to meet with officials from the CFPB and the NCUA.

For the full Fed blog post and more on student lending, use the resource links.
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