A Disturbing Trend: Part 2
Posted: Jul 04 2014
Figure 1 is awesome and worth further examination. So let's get started on that, beginning with the information concerning home ownership.
As student debt is growing in size and prevalence, home ownership is dropping and the reason why one goes up while the other goes down, and vice versa, is pretty intuitive.
When one incurs student debt, one becomes burdened with debt and all of its obligations. Those obligations include regular, mandatory interest payments that decrease the amount of money that you have for other everyday expenses and/or savings. Oh yeah, and if you do have money left over after paying monthly expenses and student loan interest, you might want to use it to make a dent in that great big principal amount.
These obligations, these payments, strain many households in a big way and they limit the scope of these borrowers financial horizons. A house becomes more of a dream than a reality, savings are that much harder to build, and the prospect of a financial doomsday becomes all that much more real.
Thus, the fact that home ownership among Americans under age 35 hit the lowest level on record just as indebtedness among college grads hit the highest level on record should come as no surprise.
But it's not just that these people are less willing to buy homes. They're also, on a practical level, less able to. Per the Wall Street Journal, “Americans with student debt also have seen their credit scores plunge as delinquencies rise, with the average score in the low 600s. Average credit scores on home-purchase loans stand in the mid-700s.”
The nasty implications of student debt don't stop at home ownership though. They extend to small business formation and entrepreneurship as well and there is nothing small about the whole thing.
First of all, for those of you who think that small businesses/entrepreneurs in America are a small part of the U.S. economy, think again.
Small businesses account for 99.7% of U.S. employers, 64% of net new private sector jobs, 49.2% of all private sector employment, 42.9% of private-sector payroll, 46% of private sector output, and 33% of the U.S.'s export value.
But it's hard to start a new, small business without capital. And it's hard to stay in business without sustained capital. Oh yeah, forgot to mention...it's hard to access capital with low a credit score. And while a small business owner doesn't have to make a personal guarantee to obtain credit, if he or she is starting a business, banks may require a personal guarantee in absence of tangible assets to secure against.
On top of those practical limitations, it's downright scary to incur substantial, additional debt with substantial debt already outstanding, regardless of whether it's a personal guarantee or not. It's also risky to start a new enterprise given the enterprise's low likelihood of survival and the strong possibility of not being able to take an income for months. Maybe even years.
Truth be told, joining a small business of any kind, whether as a founder or just an employee, means that one is accepting all of the above. All of the uncertainty, and almost to the same degree, that the founder of the business accepts. With looming loan interest payments, etc., that uncertainty becomes harder to accept.
Thus, it may not only be difficult to grow the number of small business in America, it could also be tough to maintain the number of them and if so, that won't just impact student loan borrowers. It will hurt us all.
The American spirit, the American economy, the people who live and work in America, have a always found unique, innovative ways to overcoming large, daunting challenges. Plus, America's continued financial success is in the best interest of pretty much every country in the world. So, I'd wager a pretty penny on America and after the release of today's job report, I'd even double down on my bet. But there's no doubt that it's a bet. A wager. Not a forgone conclusion.