Student Debt Delays Home Buying

Between every two facts, there is rarely a straight line.

Ten years after the financial meltdown that heralded the Great Recession, student debt has risen to record levels while home ownership remains lower than generations past, especially for those who should be in their prime home-buying years.

Jonathan Spader, a senior research associate at the Joint Center for Housing Studies at Harvard University, said pinning the drop in home ownership among young people on student loans is difficult. Yet, his studies show the rising levels of student debt are contributing at least a bit to the declining rates of home ownership.

“It’s fair to say there’s an impact; it’s harder to say how large the impact is,” Spader said.

The baby boomer generation bought homes, and used credit cards more aggressively than millennials, said Rod Griffin, director of consumer education for Experian, a credit reporting and marketing company.

Home ownership 10 years ago was inflated by loans that required little proof of income, and offered low, interest-only payments for the first few years before ballooning.

“We were seeing loans to people in the low 600 range, and even below that into the 500s. Griffin said lenders should have known then that the loans would fail “because credit scores are right.”

Millennials, those born 1981 to 1996, were just 12 to 27 years old when the financial crisis of 2008 occurred, so few would have been old enough or ready to buy a house. Many chose to attend college or stay in school longer because the job market was so bad. Now many are at or past their prime home-buying years.

“For many millennials, the burden of student loan debt is slowing their home buying and other kinds of credit relationships,” Griffin said.

Young people’s ability to obtain their first mortgage will depend in part on how well they bet on the amount they borrowed for their education, how they’ve managed their debts, and the jobs they’ve gotten since graduation, said Brian Gunn, managing director of MeasureOne Inc., a San Francisco-based consulting firm that analyzes the financial impact of student loans.

“As young borrowers continue to layer on debt for education, student loan debt will factor into debt-to-income ratios when they shop for cars or homes,” Gunn said.

“For certain other lenders, it’s going to be a hindrance to extending credit to these young borrowers,” he said. “Student debt is an investment. They have to make a wise choice and a wise investment in what they’re studying and how much they borrow.”

About 44.2 million Americans owed $1.41 trillion on student loans as of June 30.

Credit unions hold only a tiny portion of those loans in form of private student loans. Their portfolio was $4.7 billion on June 30, up 15.1% from a year earlier. While default rates have been high among federal student loans, the private loans have performed well.

Credit unions tend to target special groups such as graduate students who have high education costs and high income prospects. Their loans tend to offer much better rates than federal loans, making them attractive to borrowers who are unlikely to need the payment flexibility of federal loan provisions.

Private student loans accounted for just 0.5% of total loans in the portfolios of all federally insured credit unions as of June 30. The overall share was up a hair from a year. Once again, Navy Federal Credit Union, Vienna, Va. ($91.8 billion in assets, 7.9 million members) and PenFed Credit Union, Tysons, Va. ($23.7 billion in assets, 1.7 million members) had large increases because of recently expanded programs. But those gains were offset by declining portfolios among others.

Among all private lenders, including Sallie Mae, growth has been modest, with graduate lending falling and undergraduate loans rising, according to the first-quarter report from MeasureOne, Inc.

Tuition has continued to grow in the last few years, but not at quite the feverish pace of previous years, Gunn said.

“If tuition skyrocketed again, and federal borrowing limits remained the same, then you’d have a bigger gap and more student lenders come in to fill some of that gap,” Gunn said.

Credit unions see private student loans as a great opportunity to draw younger members, and get involved with them earlier in their financial life, Gunn said.

“If you refinance their student loan, you have a relationship with them to work with them for their first credit card, their first auto loan or their first mortgage,” Gunn said.

While many credit union members might not have a student loan through a credit union, many credit union members have student loans, and that fact can affect their ability to borrow—maybe just a little or maybe a lot.

Navy Federal, the nation’s largest credit union, sees little impact from student loans.

While many people have student loans of $20,000 to $30,000, their monthly payments are typically $140 to  $150—less than a car payment and not making much of a dent in their debt-to-income ratios, said Randy Hopper, senior vice president of mortgage lending.

At the same time, Hopper recognizes that homeownership rates for millennials lag those of previous generations.

“That’s where there’s such a growth opportunity,” Hopper said.

Many of Navy Federal’s members are in their 20s, financially stable and either shopping for a home or getting ready to enter the housing market.

“Demographics historically are a positive for Navy Federal,” Hopper said.

One advantage for Navy is that it can offer members VA loans, which offer better rates and first-time buyer benefits. Its average loan is $270,000, and about 60% to 65% of its purchase mortgages are to first-time buyers.

On the operations side, it has focused on building its reputation as a lender that can close within 30 days. “We’re able to deliver on that.”

The Federal Reserve’s Survey of Consumer Finances finds higher median loan payments among some borrowers with student loans, Spader said.

Among renters who have student loans and graduated with a 2- or 4-year degree, half paid more than $250 a month on their student loans in 2016, or 5.5% of their income. Among homeowners with a student loan, the median payment is $210, or 2.9% of income.

From 1982 to 2002, homeownership for those under 35 ranged from 37% to 41%, with an average of 40%. With economic growth and looser lending standards, homeownership rose to an average of 43% from 2003 through 2007.

Foreclosures had been rising even before the Great Recession officially began in late 2007, and homeownership rates began slipping after reaching peaks around 2004. With the financial crisis of 2008 and massive layoffs, census data shows homeownership rates fell for all age groups.

But the drop was deepest for those under age 35. Their rate of homeownership was 35.3% in 2017, up from 34.5% in 2016. Besides a 14 basis point gain in 2013, last year was the first gain since peaking at 43.1% in 2004.

One impact is that the monthly student loan payments reduce renters’ ability to save for a down payment, and the lack of a sufficient down payment is the single biggest hurdle to home ownership, Spader said.

Another factor has been tight rental markets. Young people have been paying higher rent, which again cuts into savings for down payments.

And the under age 35 group includes those who graduated from college just in time to enter the job market in the aftermath of the financial crisis. So they lost years waiting on tables rather than starting their careers in the fields the trained for.

Lastly, there is a general trend of young people waiting longer to marry and have children, which traditionally has been a strong predictor of home buying. This might reflect changes in cultural attitudes more than economic status, but Spader said recent surveys show that the belief in home ownership remains strong.

About 80% to 85% of respondents within all age groups either own a home or aspire to own one. “Among younger households, it’s just as high as among those older groups,” Spader said.