Brookings Report Disputes Link Between Student Debt and Home Ownership Rates

Posted By Derek Johnson on May 27, 2016 at 9:07 am
Brookings Report Disputes Link Between Student Debt and Home Ownership Rates

Two years ago, noted economist Larry Summers gave an ominous warning to young college students across the nation: falling rates of home ownership was slowing down the recovery and large student debt burdens were the main force driving that fall.

“A crucial factor slowing down the recovery has been the limited demand for homeownership…[t]hat is driven by the overarching life-shaping imperative of managing student debts for too many young people,” said Summers during a conference call, according to the Wall Street Journal.

Others like Nobel Prize-winning economist Joseph Stiglitz and Federal Reserve Chairwoman Janet Yellen concurred with this view, which was largely based on a report from the Federal Reserve Bank of New York on the effect of student debt on homeownership. Using numbers pulled from a large dataset of credit reports, the authors found that during the recession, those who had student debt saw their rates of homeownership drop at far higher rates compared to those who had none. Among 30-year-olds, those with no student debt actually purchased homes at higher rates than those with student debt.

The authors used these findings to conclude that student debt (and therefore a college education) may actually make it harder for the average American to own a home. If accurate, the report would strike a huge blow to the higher education industry as a whole and lend further credence to the argument that the cost of a college degree has gotten out of control.

Now, a Brookings Institute report by senior fellow and University of Michigan professor Susan Dynarski is pouring some cold water on these findings. Specifically, Dynarski questions whether the data used by the Federal Reserve of New York (credit reports) can accurately measure college attendance.

“Credit reports do contain detailed information about debt, including student loans, mortgages, credit cards and car loans. But they say little about the borrower herself. In particular, they include zero information about education. What we therefore can’t do with the credit reports: compare the homeownership rates of those who a) did not attend college, b) attended college and borrowed, and c) attended college but did not borrow,” wrote Dynarski.

Dynarski uses a later report by the Board of Governors of the national Federal Reserve which does incorporate this data to find that the when these factors are considered, those who attended college are still significantly more likely to purchase a home than those who didn’t.

“When people are in their early twenties, those who did not attend college are most likely to own a home. Why? They have been working since high school and are beginning to settle down…[while] their college-educated counterparts are just entering the labor force,” wrote Dynarski. “The college-educated catch up fast, though, and have higher rates of home ownership by age 27. By age 35, the gap in homeownership between those with and without a college education is about 14 percentage points.”

The results of these reports come in the midst of a growing debate about the value proposition of a college degree as well as the effect that modern student debt loads have on the average graduate’s ability to build and accumulate financial assets later in life. University of Kansas professor Melinda Lewis has written extensively on the latter subject, most notably co-authoring the book “The Real College Debt Crisis” with fellow KU professor Dr. William Elliott III. Lewis said the Brookings report was a valuable addition to a growing body of research examining the effects of student loan debt on long-term asset building. While she agreed that those with a college degree are “absolutely” still better off than those without, she pointed to the late start that college graduates with student debt get in buying homes relative to those who graduated without debt as one of many elements of the current financial aid system that creates disparities in long-term wealth accumulation.

“Over time, do students who have to borrow ‘catch up’ with students who didn’t go to college? These data would suggest that yeah, they do,” said Lewis. “We would ask: is there something still inequitable about the fact that some students have to rely on student loans to pursue their dream of higher education while others are positioned to avoid that?”

While those disparities close over time, Lewis argues that spending 10-15 years paying off student debt before buying a home can still have dramatic long-term effects.

“Really what happens in that early post-college time period matters a lot. When [debt and debt-free graduates] are measured at 38 and you’re both homeowners, it’s going to look like neither of you have been negatively affected by student loans. On some level, that’s true, but one of you has been building up wealth for a decade and one of you hasn’t.”

In her report, Dynarski frames these findings as the beginning, not the end, of examining the link between student debt and home ownership.

“These simple graphs are by no means the final word on understanding the effect of student debt on home ownership,” wrote Dynarski. “I show them because simple visuals can deliver a powerful message. Indeed, the deeply misleading graphs from the New York Federal Reserve have influenced the views of key economic thinkers and the public at large. The newer data also deliver a powerful, visual message: the college-educated—even those with student debt—are winners in our economy.”

Derek Johnson
Derek Johnson is a writer, journalist and editor based out of Virginia. He received a Master’s degree in Public Policy at George Mason University and a bachelor’s degree in Communication from Hofstra University.

You May Also Like