Study: ‘Unmanageable’ Student Debt Holding Back Millennial Homeownership
Student loan debt could be having an even greater impact on homeownership decisions for first-time home buyers, according to a new study by the Joint Center for Housing Studies at Harvard University.
The paper, Student Loan Debt and the Housing Decisions of Young Households (http://jchs.harvard.edu/sites/jchs.harvard.edu/files/lew_research_brief_student_loan_11_2015_0.pdf), noted even as households shed other types of non-housing-related debt, student loan debt was the only type of consumer debt to rise steadily during the Great Recession.
“Many are concerned that unmanageable student debt is holding back Millennials from becoming first-time homebuyers,” said Irene Lew, research assistant with the Joint Center and author of the study.
The study uses Federal Reserve’s Survey of Consumer Finances data to analyze the extent to which young renter households aged 20 to 39 are burdened by their student loan payments and explores the potential implications of these payment burdens on future decisions to pursue homeownership. It said following the Great Recession, the share of young renter households aged 20 to 39 with high student loan burdens (those allocating more than 14 percent of their monthly income toward student loan payments) nearly quadrupled, from 5 percent in 2007 to 19 percent in 2013.
“Although the lowest-income young renters are faced with the highest payment burdens, even the lower payment burdens among renters in the top quartile are large enough to be factored into the ability to purchase a home,” the study said. “Student loan debt may also delay the accumulation of savings for a down payment on a home, as cash savings and assets are generally lower among young renters with student loans compared to those without them.”
The study noted homeownership rates have been consistently lower among young households with medium and high payment burdens relative to those with low burdens. It said young renters at the lower end of the income distribution are more likely to bear the brunt of student debt payment burdens. When factoring in other non-housing debt payments on top of student loan payments, the mean payment-to-income ratios increase to 22 percent for young renters in the bottom quartile and to 8 percent for those in the top quartile.
“Although the lowest-income renters are faced with the highest payment burdens, even the lower payment burdens among renters in the top quartile are large enough to be factored into the ability to purchase a home,” Lew said.
The study cites another concern, rising student loan default rates, which reflect a growing share of borrowers struggling to pay down their debt. According to the Department of Education’s Federal Student Aid Data Center, 3.2 million borrowers are in default as of the third quarter of 2015, up by more than half (52 percent) from the same quarter two years ago.
“Rising student debt levels and payment burdens among young renters are likely to impact this group’s long-term finances and their decisions to transition to homeownership,” Lew said. “Delinquency and default can harm the ability of young renters to access low-cost credit and qualify for a home-purchase mortgage. Furthermore, student loan payments reduce young renters’ discretionary income and can delay the accumulation of savings toward a down payment on a home.”
