The rate of home ownership in the United States has declined from 69 percent in 2005 to 65 percent in 2014 (the latest data available), in great part due to the hangover from the financial crisis. But the picture is tougher for millennials age 24 to 32, among whom the rate of ownership has declined by 9 percentage points.
According to a recent paper by Federal Reserve economists, the surge in student loan debt is a significant factor, accounting for about 20 percent of the drop and promising to worsen as average loan balances continue to rise. Clearly this presents a conundrum to policymakers weighing greater access to higher education against years of constraining monthly debt payments.
Total outstanding student loan debt has soared by any measure. The total debt has now reached over $1.5 trillion, a whopping 300 percent increase since 2004 and now exceeding both auto loans and credit card debt. The average graduate in 2018 walked away owing nearly $40,000 and faces a $350 monthly payment as far as the eye can see. It is intuitive that such a burden is impeding household formation among recent graduates. The new Fed paper presents an estimate of just how much.
One obvious transmission mechanism is the impact on the borrowers' credit score. Student loans are reported to credit agencies and are factored into lending decisions when applying for a mortgage. In general, higher student loan balances are correlated with lower FICO scores later in life. Additionally, borrowers with significant balances are more likely to default on their student loans with major adverse impact on reported credit scores. And note that even in the event of bankruptcy, federal education loans are general not dischargeable and live on as an obligation.
To get a sense of perspective, consider the following: the Brookings Institution estimates that 40 percent of borrowers who enrolled in college in 2005 will default on their student loans by 2023. The annual default rate is around 10 percent, and the delinquency rate (over 90 days past due) makes up a similar fraction.
Higher student loan repayment obligations also make it harder for young people to save for a down payment and further limit access to the housing market.
The researchers estimate that every additional $1,000 in student loan causes as much as a 2 percentage point decline in homeownership among borrowers in the 24 to 32 age group. This implies that 400,000 young people who otherwise could have bought a home have been pushed out of the market.
In another interesting Fed paper released on the same day, researchers found that student loan debt may be impacting migration patterns. In particular, student loan borrowers are significantly more likely to leave their rural roots for larger metropolitan areas to improve their income potential.
The moral of the story is to exercise extreme caution when deciding how to finance a college education. Parents would do well to counsel moderation, particularly with regard to institutions with rich amenities that are not directly related to classroom instruction. Obviously scholarships and grants should be investigated, but there is value in expecting the student to find part-time employment or on-campus work study opportunities.
If you already have the sheepskin (and the debt), contact your lender. There are alternative repayment schedules based upon earning capacity, and in some cases the remaining debt can be forgiven after 10 years under specific circumstances subsequent to a history of consistent payments.
There is truth in the adage: "live like a student when you're in college, so you don't have to live like one when you graduate".
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.