Crushing student debt is not only killing dreams, it's hurting the broader economy.
The Consumer Financial Protection Bureau (CFPB) is warning of the "potential domino effects" to the economy of high student debt. A just-released report from the consumer watchdog highlights the ways this debt can deplete savings, limit spending, and shape choices about a graduate's career path and where to live.
"College can open up many opportunities, and we do not want that college degree to become more of a burden than a blessing for those saddled with unmanageable debt in a tough employment market," said CFPB director Richard Cordray in a statement. "So we are concerned that unmanageable student loan debt may be harmful to recovering consumer markets and may be dragging down borrowers' lives."
The average amount of student loan debt for the Class of 2011 was $26,600, a 5 percent increase from approximately $25,350 in 2010, according to The Project on Student Debt.
In February, the consumer bureau asked for suggestions on ways to encourage affordable repayment options for those with existing student loans. It received more than 28,000 comments from borrowers, lenders, businesses and government officials.
An analysis of these comments found several major areas of concern.
Housing: Student debt may reduce home ownership by limiting the borrower's ability to qualify for a mortgage or even save for a down payment.
This is troubling because first-time home ownership stimulates the economy and makes it possible for existing homeowners to "move-up" to another house.
Student Loan Debt Hurts Housing
Student debt in the U.S. is now second to mortgage debt. CNBC's Diana Olick reports Americans are finding it harder to afford a mortgage because they're weighed down with student loans.
Small Business Development: Outstanding student loans can limit a graduate's ability to save enough capital to start a small business or access small business loans.
Retirement Savings: Student loan payments can divert cash from retirement savings. The CFPB cites recent research that shows only half the workers under age 30 have enrolled in their employer's 401(k) plan and barely 40 percent contribute enough to receive a full employer match.
Graduates may need to rely on their parents, who are nearing retirement age, to help pay their debt.
Rohit Chopra, the CFPB's student loan ombudsman, told NBC News the comments show student loan debt is having a negative effect on how millions of people live their lives.
"Many borrowers expected their college education to be a vehicle to a better life," Chopra said. "College graduates do earn more money than those who do not have a college degree, but for those with heavy levels of student loan debt it might mean a more difficult time buying a car, simply to get to work. If their credit is hurt, it might mean they won't pass employment verification checks to get that job in the first place."
Hopefully, things will get better as the economy recovers and graduates are able to get better-paying jobs that let them pay off debt. But right now, Chopra said, "many borrowers, particular those with private student loans, are struggling."
So what can be done about this?
The report outlines a number of options suggested in the public comments. Some are market-based solutions; others would require a public policy change. Here are a few of the possibilities:
Create refinance options for those who pay on time: Borrowers who graduate, find a job and make their payments on time will typically pay back their loan in full. And yet, they may not be able to refinance their high-rate private student loans with a lower rate that reflects their lower risk to the lender. With some type of "refi relief" these borrowers could potentially save thousands of dollars.
Help for those in distress: There aren't many options for borrowers who are trapped in private loans and unable to make the payments. Last year, the CFPB reported that lenders and loan servicers are often unwilling to negotiate affordable terms. The proposed "road to recovery" program would be a negotiable, transparent, step-by-step process where the lender lowers monthly payments to match a reasonable debt-to-income ratio.
A fresh start for those who default: What if lenders worked with these borrowers to design a payment plan that would let them get out of default and repair their credit? This "clean slate" payment option could have a ripple effect; making it possible for borrowers who default to get a good job and get back on their feet.
At a public hearing in Miami Wednesday night, CFPB director Cordray said the future of this country is linked to the growing burden of student loan debt.
"What is at stake is whether some of our most motivated and ambitious citizens – who have the talent to make something of themselves, and lack only the means – will be able to rise and form part of the future leadership of this nation," Cordray said in prepared remarks. "If instead their hopes and dreams are diverted, discouraged, and defeated by the crushing burdens of a debt that ruins their prospects, we all will be poorer as a result. So this problem should be sounding an alarm bell for all Americans."