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Education Debt in the Ownership Society

Will the twin crises of housing and education debt freeze young people out of the American dream?

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As a result, many of these owners are stuck paying for underwater properties that they will only be able to get out of if the market increases beyond the bubble years. The only alternative to hanging on is for a seller to pay a bank for the difference in property value at closing or walk away. But hanging on is a long-term proposition that, in most cases, relies on enormous job stability, as well as the cultivation of a pool of new buyers that would cause property values to rise again. Unfortunately, we are already seeing that there have been significant reductions in the numbers of first-time buyers: between 2009 and 2011 only 9% of 29- to 34-year-olds were approved for a first mortgage. And in 2011 we saw the lowest level of mortgage originations since 2000, well before the Great Recession.

Part of the issue here is that home prices are higher in urban areas, where jobs tend to be concentrated. The influx into cities is so pronounced that some rural areas have started offering incentives of thousands of dollars toward student loan payments to generate population growth and attract needed skills. Not only are younger Americans unable to buy homes, but with over $1 trillion in underwater mortgages nationally, they have seen the downside of ownership first-hand, and question the wisdom of getting into mortgage debt at all.

As a result, the housing market may be frozen for the long-term, with owners continuing to walk away due to changing circumstances and lack of property appreciation, and with younger generations either locked out due to student debt or forgoing ownership because it just doesn’t seem like the deal it used to be.

Responsibility for Debt

The harsh realities facing homeowners and student loan debtors have led to calls for mortgage and student loan write-downs. These calls have been met with a simple but powerful logic that asserts the importance of keeping one’s word. But this logic of personal responsibility fails to take into account the way the economic system works at its most fundamental levels. Most Americans view the morality of repaying debt so rigidly because they believe that someone is lending money that was previously in existence somewhere. In spite of the language of lending, the reality is that money is created through debt. Going into debt is not most accurately described as borrowing, because the acquisition of a debt is also simultaneously the creation of money. The relationship is reciprocal, and not one-sided. This realization changes the morality of owing; there is no kind person out there doing you a favor by giving you a loan; rather, a bank was generating money through its interaction with you. 

Though it went largely unnoticed, one sign that the era of expanding opportunity through government programs (like Fannie Mae and the GI Bill) was over came in 1970, when the government created Freddie Mac for the purpose of generating mortgage-backed securities. Under a stated logic of expanding homeownership, this entity was created as a quasi-private corporation with implicit government guarantees. The birth of Sallie Mae in 1972 came out of this same era of shifting responsibilities from the public to the private.

But, unlike housing, the student loan industry came with an explicit guarantee that the government would back defaulted loans. In both cases these guarantees created a secondary market for debts, allowing them to move through the system as securities, generating wealth for the investor class. In the case of student loans, the combination of deregulatory practices, loss of consumer protections and government guarantees led to tuition increases, in the same way that presumed government guarantees for certain types of mortgages helped inflate the housing bubble.