The Impact of Student Loans on the Housing Market

For many years, student loan debt has been seen as a significant hurdle to homeownership, particularly for younger generations like millennials. The burden of student loans is often cited as a key reason why young adults are delaying major life events, including purchasing a home. Student loan debt has risen sharply over the past few decades, creating significant financial obligations for graduates. Now, a whopping 43 million Americans have student loan debt! They owe almost $1.8 trillion in total, with $1.6 trillion owed in federally-backed student loans. Americans now hold close to $1.2 trillion in outstanding student loan debt making it the second largest form of consumer debt after home mortgages.

The Increasing Burden of Student Loan Debt

Student loan debt has increased from about $200 billion in 2003 to over $1.7 trillion in 2021. As demand rises, supply constraints are leading to significant rental cost burdens, particularly at the low end of the income distribution. With an average borrower carrying about $37,000 in student debt, it’s easy to see why many assume that such financial burdens could prevent homeownership.

The Correlation Between Higher Education and Earning Potential

A major takeaway from the report is the correlation between higher education and increased earning potential. While student loan debt can be burdensome, it is also a reflection of the pursuit of higher education, which typically leads to higher income levels. According to the report, millennials with a bachelor’s degree had an estimated $250,000 more in house-buying power compared to those with only a high school diploma. Moreover, the report found that the homeownership rate among millennials with a bachelor’s degree was 12.8 percentage points higher than among those with just a high school education.

Student Loans and Delayed Homeownership

While student loans may not prevent homeownership altogether, they can certainly delay the process. Many young adults, particularly those burdened with substantial student loan debt, choose to delay purchasing a home until they feel more financially secure. However, the First American report emphasizes that delaying homeownership doesn’t mean giving up on it. In fact, millennials are entering the housing market in large numbers as they reach their prime home-buying years. This growing homeownership rate suggests that, while student loans may delay the process, millennials are still becoming homeowners at a pace comparable to previous generations. The number of households aged 25-34 with student debt increased by 50 percent from 2001-2010, ending the decade with nearly four in ten households with student loans.

Impact on Employment Decisions

While the plurality say student loan debt has not impacted any of the tested employment decisions (42%), others say debt has kept them in disliked or uninteresting jobs, forced them to take second jobs, or take a job outside their preferred field.

Impact on Life Choices

Approximately half of student loan debt holders say their debt has impacted their life choices. Over one quarter of student loan debt holders say their debt has impacted their decision or their ability to purchase a home (29%), take a vacation (35%), or purchase a car (31%). One third say it has impacted their ability to continue their education (33%) while 14% say it has impacted their decision to start a family.

Other Factors Influencing Homeownership

Another key factor to consider is the role of mortgage interest rates and housing affordability. In recent years, low mortgage interest rates have helped make homeownership more accessible, even for those carrying student loan debt. Additionally, the concept of real house-buying power, which accounts for income levels, mortgage rates, and home prices, is crucial to understanding how student loan borrowers can still afford homes. The math has shifted: in 1985, the median home price was roughly 3 to 3.5 times median income.

Student Loan Debt: A Manageable Challenge?

The First American report challenges the widespread belief that student loans are preventing homeownership for an entire generation. Factors like longer repayment terms, lower student loan interest rates, and increased earning potential from higher education all work together to make homeownership a realistic goal for many borrowers with student debt. In the end, student loan debt is a manageable challenge, not an insurmountable one.

Credit Reporting and Mortgage Qualification

As the Department of Education reinstates credit reporting for missed student loan payments, experts warn that borrowers' financial standing-and their ability to qualify for mortgages-could suffer lasting damage. The move ends a temporary grace period that began when payments resumed in October 2023, during which missed student loan payments were not reported to credit bureaus.

That buffer was designed to ease borrowers back into repayment after the pandemic-era pause, but starting next month, delinquencies will again appear on credit reports, affecting not only credit scores but also debt-to-income ratios-both key components in securing a mortgage. "Credit plays a critical role in homebuying," Kevin Thompson, CEO of 9i Capital Group, told Newsweek. "Poor credit can lead to higher interest rates or even prevent access to credit altogether."

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Potential Impact on First-Time Homebuyers

The shift may be most harmful to first-time homebuyers-which is already at a historic low. "The resumption of student loan payments just makes it harder," Matt Schulz, chief analyst at LendingTree told Newsweek. "That student loan payment is money that can't go toward saving for a mortgage down payment… It also means less money for the monthly mortgage payment once you do get the house."

Ryan said the student loan situation is like "watching dominoes fall in slow motion," and noted the drop in credit scores could be massive for some people. "Those credit score drops are just brutal, up to 170 points for some folks…Then your debt-to-income ratio gets thrown completely out of whack because those payments are back."

The Importance of Financial Education

Alex Beene, a financial literacy instructor at the University of Tennessee at Martin, told Newsweek: "The past few years of renewed efforts to lower or completely eliminate student debt for some borrowers left millions of Americans thinking widespread forgiveness could be right around the corner. Pair that with a pause on payments and reporting data to credit bureaus, and you have a perfect storm to discourage payments."

"Perhaps the most unintended problem of all is many borrowers didn't get educated on what late payments equate to in financial terms. Not only do missed payments tank your credit score, but they also make it harder for you to secure any other type of loan, be it a car, home, or something as simple as a credit card. The only way to resolve the issue is to encourage borrowers to resume making their payments. Slowly, their score will improve."

Government and Institutional Responses

Economists and sociologists generally agree that certain socio-cultural factors influence homeownership among some demographics more than others. Student loan debt delays certain age groups from purchasing a home, but does not permanently prevent them from eventually becoming homeowners. Lawmakers have made efforts to mitigate student debt if it helps people purchase homes. On the national level, one such bill is the Transforming Student Debt to Home Equity Act of 2022. The Maryland Mortgage Program is a home ownership assistance program for recent college graduates and first time buyers. Specifically, the Maryland Smartbuy 3.0 sub-program assists first time homeowners who still have student debt. The Grants For Grads program is an assistance program intended for home purchasers who graduated college within the last 48 months. The Ocean State Grad Grant is specific to recent graduates who received their diploma 36 months ago.

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Student Loan Debt and Home Equity

People with student loan debt, however, buy homes that are 39.2% less expensive and have 58% less home equity compared to first-time home buyers without student loans. In addition, it is found that the amount of student loan debt is important. People with student loan debt above the median amount among people with student loan debt ($35,000) are 27% less likely to be first-time home buyers.”

Alternative Perspectives

“In a study of Canadian postsecondary graduates, it was found that those who had borrowed using student loans did not differ significantly from those who had not borrowed in terms of employment rates, total personal income, and likelihood of having a registered pension plan. However, it was found that those who borrowed were less likely to have savings and investments or to own their homes. In a similar vein, a study by Mezza et al. estimated that each increase in student loan debt of $1,000 results in a reduction in the home ownership rate of approximately 1.8 percent. Their study focuses on individuals in the age range of 22 to 32 who attended 4-year public institutions.”

Student Loan Debt and First-Time Home Buying in USA

“The authors find that having student loan debt does not by itself prohibit first-time home buyers. On the contrary, having student loan debt increases the likelihood of homeownership by 15.1%.

Homeownership Among Young Americans: A Look at Student Loan Debt and Behavioral Factors

From Abstract: “Three key findings arise from the research. First, life cycle and demographic characteristics, such as marital status, education, and income, continue to be strong predictors of homeownership. Married households with a college degree and children are among the most likely to own a home. Second, young adults with student loan debt are no more or less likely to own a home than someone without debt after controlling for a number of factors; however, students who have already paid off their loans are more likely to own a home. Finally, respondents who express a willingness to take risks in finances are more likely to own a home while those who are more conscientious are less likely to own a home.”

Increased Demand for Rental Housing

Elevated unemployment levels, weak incomes and high debt levels may account for the slow rate of household formation that we have seen coming out of the housing and financial crises. Whether measuring existing Millennial-headed households or those we expect to form in the coming years, it is a near certainty that many will be renters. In addition to falling incomes, mortgage credit continues to remain tight and monthly student loan payments affect the maximum mortgage payment a lender might entertain. High student loan debt is therefore a factor contributing to increased demand for rental for the foreseeable future.

Policy Solutions and the Role of the Housing Sector

Moving forward, the adoption of feasible policy solutions to the challenge of rising student debt levels is unlikely. Widespread debt restructuring or forgiveness on the scale necessary to fundamentally shift the prevailing trends is untenable from a budgetary or political perspective. As we wait for more durable economic and educational reform, it is the role of the housing sector to seek a more balanced housing policy that puts rental housing and homeownership on an equal playing field.

The Need for Affordable Rental Housing

Yet there is a clear and growing need for rental housing. As demand rises, supply constraints are leading to significant rental cost burdens, particularly at the low end of the income distribution. According to the JCHS, among households earning $15,000-$29,999, three-quarters of renters are cost burdened and more than two-thirds are severely cost burdened. In the near term, supply is likely to remain constrained. While the multifamily market has rebounded better than the single-family market, the number of new units under construction in 2013 still lags historical trends, and older units from higher-production decades are being demolished, many of which are part of the lower-cost housing stock. Insufficient new supply relative to historical trends and a declining homeownership rate have led to rental vacancy rates that are at their lowest point since 2000, allowing rent to outpace inflation. To underscore the scope of the supply problem, if we were to dedicate every single new housing unit produced at current construction rates to extremely low-income households, it would take more than 8 years to fill the gap of 8.2 million affordable and available. State and local governments should take action to remove zoning and regulatory barriers to both market-rate and affordable housing. Existing federal support for the development and preservation of affordable housing should be protected and expanded.

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