Federal Reserve Bank Ties Student Loan Debt to Housing Slump
Posted By Abby Perkins on April 8, 2015 at 2:11 pm
According to the most recent reports from the New York Fed, a college degree is still a valuable tool for lifelong success. However, some graduates are finding that the burden of student loan debt is preventing them from achieving the financial autonomy and stability that a college education promises. One specific effect? Recent graduates are increasingly unwilling or unable to take on a mortgage, contributing to a decline in home ownership among Americans 25-34 years old.
Student debt is on the rise
Before the Great Recession, student loan debt accounted for the smallest form of household debt, behind car loans, credit card debt and home equity. But by 2010, they caught up, and by the end of 2014, student loan debt far surpassed all other categories of household debt. With a total balance of nearly $1.2 trillion, the number of borrowers has almost doubled, and the average balance per borrower is up nearly 75%.
More student borrowers, fewer mortgages
In the past, and particularly before 2008, Americans with student debt were more likely to have a mortgage. This is probably because student debt was an indicator of higher education, which leads to higher income levels. Since 2008, however, the number of 30 year-olds with both student debt and a mortgage has fallen consistently. In 2011, the number fell below that of 30-year-olds with no student debt for the first time in recent history.
How the numbers fit together
The short story is that more students are taking on higher levels of debt. And although their income will generally be higher than their non-graduate counterparts, the financial burden of monthly debt payments is substantial enough to stand in the way of home ownership. For some graduates, there simply is not enough income to afford a mortgage after making loan payments. For other graduates, however, it appears that creditworthiness is getting in the way. M
More than 11% of borrowers have loans that are 90 days or more overdue. And for the three major credit bureaus, student loans affect a borrower’s credit score just like any other installment loan. If the full amount due each month is paid on time, it will help the borrower’s credit. On the other hand, missing payments and defaulting on loans can severely damage a borrower’s score and limit their ability to obtain a mortgage, especially in light of recently tightened lending standards.
If today’s college graduates want to achieve their piece of the American Dream, they need to keep a close eye on student loans. It can be tempting to borrow whatever it takes to complete a college education, without considering the long-term impact of these debts. In the near future, students may have to adjust their expectations for home ownership – or find alternate ways to finance their educations.