Student loan debt is putting a dent in young people’s pockets that is contributing to a much lower level of home ownership over the past decade.
Federal Reserve economists studied the impact that the $1.5 trillion in educated-related loans is having on those aged 24 to 32. They found that while it is not the principal contributor to the decline in housing purchases, it is playing a significant role.
“In surveys, young adults commonly report that their student loan debts are preventing them from buying a home,” Fed researchers Alvaro Mezza, Daniel Ringo, and Kamila Sommer said in a paper released Wednesday. “Our estimates suggest that increases in student loan debt are an important factor in explaining their lowered homeownership rates, but not the central cause of the decline.”
Home ownership among all Americans for the study period declined 4 percentage points, from a peak of 69 percent in 2005 to a trough of 65 percent in 2014. However, the decline was much more pronounced among those in the 24-to-32 group, which saw a plunge from 45 percent to 36 percent.
The paper did not identify the other causes for the decline but indicated that about 20 percent could be attributed to the student loan burden. The economists said per capita college debt doubled in the period from $5,000 to $10,000.
Each increase of $1,000 in debt, then, led to a 1- to 2-percentage-point decline in home ownership. In real terms of the populace, that meant 400,000 who otherwise would have expected to own homes did not because of their student loan burden, the paper said.
“This finding has implications well beyond homeownership, as credit scores impact consumers’ access to and cost of nearly all kinds of credit, including auto loans and credit cards,” the researchers said. “While investing in postsecondary education continues to yield, on average, positive and substantial returns, burdensome student loan debt levels may be lessening these benefits.”
Much of the debt surge came during and after the financial crisis.
As unemployment rose, the demand for higher education also increased and the government federalized the loan program. Tuition for private nonprofit schools has increased by 56 percent since the turn of the century, according to the College Board, but salaries have not kept up and worries have persisted over a possible wave of defaults or a need for forgiveness of outstanding loans.
The Fed team suggested a number of ways to address the issue, such as more state government involvement in financing and loan repayment terms based on income.