How Student Loans Can Impact Homeownership And Credit Scores

How Student Loans Can Impact Homeownership And Credit Scores – The increase in student debt over the past decade has led to a decrease in home ownership among young people.

The benefits of owning a home in the United States cannot be overstated. The housing market in the United States both reflects and causes the widening divisions in American society; the availability of housing is a functional prerequisite for financial security. The Federal Reserve’s latest Survey of Consumer Finances found a huge disparity in wealth by housing status: In 2019, homeowners had a median net worth of $255,000, while renters or others had a median net worth of just $6,300. While homeownership clearly has a vital economic impact on both individuals and the economy as a whole, evidence suggests that the United States has yet to regain the overall housing wealth lost during the Great Recession.

How Student Loans Can Impact Homeownership And Credit Scores

The US Census Bureau’s historical tables of housing vacancies and homeownership confirm that the decline in homeownership is also evident among young people. From the first quarter of 2007 to 2019, the homeownership rate for people under the age of 35 declined by 15 percent, falling from 41.7 percent to 35.4 percent.

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During this same period, steadily rising tuition fees, increasing income inequality, and shrinking government funding for higher education have burdened an entire generation with unprecedented amounts of student loan debt. Although the student debt crisis is the subject of much research, well documented in previous publications in the Millennial Student Debt Project, few have examined the impact of the crisis on youth homeownership. Analyzing a ten-year range of credit bureau data (2009-2019) for student loan borrowers between the ages of 18 and 35, we examine homeownership trends for student debt borrowers and the relationship between homeownership rates and student loan debt balances.

Overall, our research shows that homeownership among young adults with student debt has declined over the past ten years. In addition, we found that people with higher amounts of student loan debt are less likely to be homeowners, especially among borrowers with relatively high incomes. This finding is particularly troubling because the growth in average student loan debt is outpacing the growth in average income. The disparity in student debt and median income is evident for all borrowers, but is particularly pronounced for those living in black communities.

We also found that despite having the lowest initial rates of homeownership, people living in predominantly Asian, black, and Hispanic communities also experienced the largest declines in homeownership rates from 2009 to 2019. In addition to student loan debt, there are many other factors that may have affected homeownership among young people in recent years, such as rising home prices and an increased preference for mobility over stability. These explanations deserve attention and research, but are beyond the scope of this post.

It seems clear that those with more student loan debt are, all else equal, less likely to become homeowners. But there are many skeptics who dispute the hypothesis that the recent decline in homeownership can be partially explained by rising student loan debt. Some of these skeptics, relying on studies that use old data that ignore recent developments in student loan debt, argue that the increase in student loan debt has had no effect on homeownership rates; others argue that there is no way to reduce the amount of student debt people have without also limiting their access to higher education, so it is difficult to infer a correlation between student loan debt and home ownership, even after accounting for income and/or education. Contrary to these positions, our analysis of the relationship between student debt and homeownership—using the most recent and reliable data available—shows that rising student loan debt is preventing borrowers from buying a home. In addition, we see that the adverse impact of student loan debt on home ownership is most evident for relatively high-income borrowers whose debt balances increase over time. Low-income borrowers face an additional barrier to homeownership due to limited access to credit. While attending college is still the primary means by which people can secure and improve their socioeconomic status, rising student debt is a major barrier to home ownership, a step that many, especially in the United States, believe is necessary for long-term financial stability. support stability.

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For this project, we used a dataset consisting of cross-sectional individual credit bureau data linked to demographic data obtained from the American Community Survey using the US Census. Each year from 2009 to 2019, one million borrowers between the ages of 18 and 35 were independently selected for cross-sectional data. For the purposes of this study, we analyzed only borrowers with an outstanding student loan balance of $500 or more. .

From these annual samples, we analyzed consumer-level data on student loan debt, mortgage debt, total debt, and debt-to-income ratios.

In general, we find that borrowers with more student loan debt are less likely to be homeowners. We show this at the state level in Figure 1, which shows the homeownership rate and average student loan debt in each state in 2019. Among the states with the highest average student loan debt, the majority have the lowest rates of homeownership, while those with the lowest average student loan debt have the highest rates of homeownership.

Looking at the ten-year trend, we see that the rate of home ownership among student borrowers, measured as the proportion of individuals with mortgage debt,

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Decreased by 24 percent from 2009 to 2019. This decline is seen among all borrowers, but as shown in Table 1, borrowers in Asian and black US census tracts were the hardest hit, with rates down 47.7 percent and 40.6 percent, respectively.

Overall, we see that our sample of student loan borrowers in 2019 has a significantly lower rate of homeownership (18.6 percent) than all households under the age of 35 (35.4 percent).

What are some other characteristics of borrowers who have faced declining home ownership rates? First, we look at homeownership rates from 2009 to 2019 for borrowers with different levels of total student loan debt and total estimated income, all in 2019 dollars adjusted for inflation.

Figures 2 and 3 show the average annual rates of homeownership for five different levels of total student loan debt. Most strikingly, we found that the homeownership rate for borrowers with an estimated income of less than $100,000 (Figure 2) never exceeded 1.2 percent over the ten-year period. Compared to the overall homeownership rate of 35.4 percent for those under 35, the unusually low rate of homeownership for lower-income student borrowers in this age group is striking — and consistent with research showing a decline in homeownership among youth with lower incomes. the end of wealth and income distribution. By screening borrowers with an estimated income of $100,000 or more, we can clearly identify the relationship between debt and home ownership. In each year of our study, higher student loan debt corresponds to lower home ownership, and the gap in the homeownership rate widens with each increase in student loan debt.

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Coupled with these trends, we find that recent cohorts of student loan borrowers also have lower estimated incomes than their predecessors. In 2009, 42 percent of our independent sample of 18- to 35-year-olds had an estimated income of $100,000 or more; in 2019, this share was reduced to 31 percent. In fact, Figure 4 shows the annual shift in cohort income by comparing the median income of the bottom 50 percent and the next 40 percent (51st to 90th percentiles) of the income distribution for each year we sampled. Median income in the bottom half of the income distribution fell from $41,600 in 2009 to $36,300 in 2019. For the next 40 percent of the distribution, the median dropped from $141,200 to $103,300. These conclusions coincide. studies show that the returns on education are not realized.

Several troubling implications emerge from these findings. First, the number of student borrowers is getting poorer, which means borrowing for college is becoming more common, making payments harder to meet, and mortgages becoming nearly impossible to afford. Second, the “earnings premium” assumption that justifies student debt is increasingly flawed; a more holistic approach that includes more than just income—such as home ownership—illustrates how student loan debt can have negative consequences even for upper-middle-class borrowers. Third, because of persistent racial wealth disparities, black students end up borrowing more—in aggregate and relative to income—than white students to attend college. And even though they have higher education, certain demographic groups still suffer the effects of wage inequality—the returns to higher education differ across racial and income groups. For further confirmation, we look at Table 1 again and see that all census Asians, blacks, and Hispanics reported significant declines in homeownership—more so than whites.

For a more in-depth analysis of the intersection of student loan debt, home ownership, and total income, we examined home ownership by breaking down student debt for individuals across three income percentile categories in 2009 and 2019. We independently calculated the student debt percentile for each year and assigned a percentile to each borrower. Then we grouped the borrowers according to their

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